TDS on income from MF investment is a big dampener, say analysts

Suresh P Iyengar Mumbai | Updated on February 05, 2020

The proposal to tax all mutual fund income will hit investors hard

After attracting savings of gym trainers to gynaecologist with the most successful ‘Mutual Fund Sahi Hai’ campaign, the government is now out to teach what is wrong with mutual fund investments.

Come April 1, mutual funds have to deduct TDS (tax deducted at source) of 10 per cent on income of over ₹5,000 generated by individual investors, according to the Union Budget 2020.

The government is set to reap a windfall gain, given the boom in equity markets and considering the asset under management of mutual fund industry has grown leaps and bounds to touch ₹26.33-lakh crore.

The proposal of twin tax system in Budget was another blow for mutual fund industry. The removal of all exemptions for a lower tax rate will take away the charm of investigating in ELSS (equity-linked saving schemes) which currently has an asset under management of ₹1-lakh crore.

G Pradeepkumar, CEO, Union Asset Management Company, said it is not fair on the part of government to levy a tax on investments with retrospective effect. For instance, when investors started a Systematic Investment Plan (SIP), it was made with an assumption that growth plans are more tax efficient as dividend incomes are taxed, but now the proposal to tax all mutual fund income will hit investors hard.


About 10-20 years back, when TDS on investments was first proposed, the income limit was ₹10,000. Now to reduce the income limit to ₹5,000 is quite shocking. Ideally, the income limit from mutual fund investments should be raised to ₹1-2 lakh so that small investors interest is protected, he added.

Pradeepkumar does not foresee investors rushing to redeem investments before April 1 just to save on TDS. However, he said future inflows into mutual fund will definitely slowdown.

Operational issue

Jimmy Patel, Managing Director, Quantum Asset Management Company, said the new tax will become an operational nightmare for mutual funds in the present form as there are lot of ambiguity and needs clarification.

The issuance of TDS certificate and calculating the overall income of each investors on multiple redemptions for cutting tax will be a big challenge. Mutual fund also have an option of multiple holders and how to account for the income generated for each joint holders is not clear, he said.

Investors chasing a little higher income in liquid schemes will now think twice as they will lose most of the gain in TDS and may prefer to stick with bank deposit, added Patel.

Published on February 04, 2020

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