Tax Deducted at Source (TDS) / Withholding Tax

Tax Deducted at Source (TDS) / Withholding Tax

Mutual funds are a popular investment option for individuals who seek to diversify their investment portfolio. As with any investment, investors earn income from mutual funds in the form of dividends or capital gains. However, the government requires mutual funds to deduct a certain percentage of tax on such income before distributing it to the investors. This tax is known as Tax Deducted at Source (TDS), also known as withholding tax. TDS is a form of advance tax paid by the investor to the government.

The TDS rate varies depending on the nature of income, the investor’s status, and the mutual fund scheme. For instance, the TDS rate on dividend income from mutual funds is 10% for resident individuals, while it is 20% for non-resident individuals. Similarly, the TDS rate on long-term capital gains (LTCG) from equity mutual funds is 10% for gains above Rs. 1 lakh, while it is 20% for non-equity mutual funds. Investors can claim a credit for the TDS amount deducted against their total tax liability at the time of filing their income tax returns.

In conclusion, TDS is an essential aspect of investing in mutual funds. It ensures that investors pay their taxes in advance, and the government receives its share of the income earned. Investors should be aware of the TDS rates applicable to them and claim the credit for the amount deducted in their tax returns to avoid paying more tax than necessary.

Here, the assessee pays tax in the assessment year on the income earned in previous year. Due to this rule the tax collection is delayed till the completion of the previous year. Even sometimes people conceal their income and the tax is not paid at all. In order to overcome these problems, government started deducted some amount of tax from the amount which is receivable by the assessee. The amount of tax so deducted is called as Tax Deducted at Source (TDS).