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The government has proposed to reduce the tax deducted at source (TDS) on NRIs investing in mutual funds depending on the tax treaty with the country of the NRI’s residential status.
According to the proposed norms, the fund houses can charge TDS depending on tax treaty or up to 20%, whichever is lower.
In the finance bill document, the government said, “Section 196A of the Act provides for TDS on payment of certain income to a non-resident (not being a company) or to a foreign company, at the rate of 20%. The income is required to be in respect of units of a Mutual Fund specified under clause (23D) of section 10 of the Act or from the specified company referred to in the Explanation to clause (35) of section 10 of the Act. Representations have been received requesting that the benefit of tax treaty may be considered at the time of TDS so that if the treaty provides a rate lower than 20%, TDS is made at that lower rate.”
Currently, fund houses charge multiple rates of TDS depending on asset class and holding period. For instance, fund houses charge TDS of 10% and 15% on long term and short-term gains on equity funds, respectively. Similarly, TDS on long term capital gains and short-term capital gains on fixed income funds is 20% and 30%, respectively.
While it is not clear if the government has put cap of 20% across all MF schemes, RTA officials believes that it would largely benefit fixed income investors, who witness deduction of over 30%.
The proposed norm is to come into effect from April 1, 2023.
