20% TDS on mutual fund redemption removed: Major tax changes from October 1
Union Finance Minister Nirmala Sitharaman announced several income tax changes in the Union Budget 2024, which came into effect from October 1, 2024. Among the key updates, approved as part of the Finance Act, include adjustments to tax deduction rates at source (TDS).
The revisions include the abolition of the 20% TDS on mutual fund redemptions, the introduction of a 10% TDS on variable rate bonds, and reductions in TDS rates on e-commerce transactions and life insurance payouts.
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What is TDS and how does it work?
Tax Deducted at Source (TDS) is a tax collection method in which tax is deducted directly from the source of income before it reaches the recipient. It applies to various forms of income, including salaries, interest, rent and professional fees. If the recipient provides his Permanent Account Number (PAN), TDS will be deducted at the specified rate. Without PAN, tax is deducted at 20%.
Changes related to TDS were part of the Union Budget announcements. One of these changes means that credits from Tax Collected at Source (TCS) can be offset against TDS for salaried employees.
Changes effective from October 1
TCS credits and TDS changes
Under the Finance Bill 2024, an amendment to Section 192 was introduced, which allowed credit of tax collected at source (TCS) in calculating TDS. This change is expected to make the tax deduction process easier for salaried employees.
Prashant Sharma, an independent chartered accountant, explained how the change would work: “If an employee, say Raj, has already paid Rs 5,000 as TCS for a foreign travel package, and his company deducts Rs 10,000 as TDS from his salary, the company will will now consider the TCS credit of Rs 5,000. So instead of deducting Rs 10,000 as TDS, they will deduct only Rs 5,000.” This allows employees to reduce their monthly tax deductions and take home more income.
Abolition of 20% TDS on redemption of mutual funds
A major relief measure for the taxpayers is the government’s decision to do away with the 20% TDS on mutual fund redemptions. This amendment, part of the Finance Bill, aims to ease the financial burden on investors.
Previously, Section 194F of the Income-tax Act mandated a TDS of 20% on payments from redemption of mutual funds. This section has now been removed, allowing investors to manage their finances with reduced tax liabilities. “The withdrawal of 20% TDS rate on mutual fund redemptions is a welcome relief,” said Feroze Azeez, deputy CEO, Anand Rathi Wealth Limited.
Tax on share buybacks
Another big change is that shareholders will now bear the tax burden for share buybacks, rather than corporations. Previously, companies were taxed at 20% on buyback proceeds. Under the new rule, the redemption proceeds will be treated as dividend income and taxed based on the shareholder’s respective tax bracket. Click here to understand how it will work.
TDS on floating rate bonds
The Union Budget 2024 also introduced changes in TDS rates for floating rate bonds. From October 1, a TDS of 10% will be deducted from the interest on floating rate bonds issued by central or state governments, once the interest exceeds Rs 10,000 in a year.
Floating rate bonds are government-backed investments that offer variable interest payouts. These bonds have a term of seven years and investors receive interest payments twice a year, in January and July. The government aims to simplify tax processes while ensuring revenue collection with the new 10% TDS rule.
TDS on the sale of real estate
If you buy property worth more than Rs 50 lakh, you will now have to pay a TDS of 1% even if the property is purchased jointly by multiple buyers. The same applies if multiple sellers are involved, with a combined sale price above Rs 50 lakh. The TDS of 1% is applicable on the purchase price or stamp duty value, whichever is higher.
Other changes that will come into effect from October 1
Several other TDS rate changes have been introduced to reduce the financial burden on taxpayers:
E-commerce operators: TDS on payments made by e-commerce operators has been reduced from 1% to 0.1%.
Life insurance: The TDS on payments from life insurance policies has been reduced from 5% to 2%.
Sale of lottery tickets: The TDS on commissions from the sale of lottery tickets has been reduced from 5% to 2%.
Rental payments: Individuals and Hindu Undivided Families (HUFs) now face a reduced TDS of 2% on rental payments, down from 5%.
Payments from e-commerce participants: TDS on payments made by e-commerce operators to participants has been reduced from 1% to 0.1%.
Section 194F removal: This section, which related to TDS on payments for redemption of mutual funds, has been eliminated.
First publication: Oct 02, 2024 | 1:23 p.m IST