Tax on distributed income of mutual funds [Chapter XII-E]:

Chapter XII-E comprises of sections 115R, 115S and 115T.

(a) Section 115R: Any amount of income distributed by the specified company as defined in the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 or a Mutual Fund to its unit holders on or after 1.4.03 shall be chargeable to tax and the specified company or the Mutual Fund shall be liable to pay additional income-tax at the rate specified in the table below –

Type of Fund	Person to whom income is distributed	Rate of tax
Equity-oriented fund	Any person	Nil
Other Fund
Money market mutual fund or liquid fund	Individual or HUF Any other person	25% 30%
Fund other than MMMF or liquid fund	Individual or HUF Any other person	25% 30%
Infrastructure Debt Fund set up as a Mutual Fund	Non-corporate non-resident or a foreign company	5%

Section 115R(2A) provides that for the purposes of determining the additional income-tax payable in accordance with section 115R(2), the amount of distributed income shall be increased to such amount as would, after reduction of the additional income-tax on such increased amount at the rate specified in section 115R(2), be equal to the amount of income distributed by the Mutual Fund.

Money market mutual fund means a means a money market mutual fund as defined in subclause 2(p) of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 i.e. it means a scheme of a mutual fund which has been set up with the objective of investing exclusively in money market instruments.

Liquid fund means a scheme or plan of a mutual fund which is classified by the Securities and Exchange Board of India as a liquid fund in accordance with the guidelines issued by it in this behalf under the Securities and Exchange Board of India Act, 1992 or regulations made thereunder.

However, this does not apply in respect of any income distributed (i) by the Administrator of the specified undertaking to the unit holders (ii) to a unit holder of equity oriented funds in respect of any distribution made from such funds.

The income from units received by a unit holder on or after 1.4.03 is exempt from income -tax.

The person responsible for making the payment of income distributed by the UTI or a Mutual Fund and the UTI or the Mutual Fund itself, as the case may be, shall be liable to pay the tax under this provision to the credit of the Central Government within fourteen days from the date of distribution or payment of such income, whichever is earlier.

Clarification regarding scope of additional income-tax on distributed income under section 115R [Circular No. 6/2014, dated 11.2.2014] Section 115R provides for levy of additional tax on distributed income to unit holders. Some Assessing Officers have taken a view that mutual funds/specified companies are required to pay additional income-tax under section 115R not only on income distributed by way of dividend but also on payments made at the time of redemption/repurchase of unit s as well as at the time of allotment of bonus units to existing investors. On these issues, the CBDT has clarified the following – (i) Section 115R(2) requires payment of additional income-tax at the rates prescribed thereunder in respect of any amount distributed by a specified company or a mutual fund to its unit holders. The income so distributed by such entities constitutes dividend paid to the unit holders and is liable to tax thereunder. However, redemption of units or repurchase of units would not attract levy of tax under section 115R(2) as such income is not in the nature of income “distributed” to the unit holders and hence, lies outside the purview of this section. (ii) Further, the income so distributed by the mutual fund or the specified company is specifically exempt from tax under section 10(35) in the hands of the recipient unit holders. As per the proviso to section 10(35), exemption of income thereunder is not applicable to those cases where transfer of units take place. The recipient of income is , therefore, liable to pay capital gains tax, if applicable, as per the relevant provisions of the Act, on transfer of such units. (iii) Also, since issue of bonus units is not akin to distribution of income by way of dividend, the same would not be subject to additional income tax under section 115R. This inference can be drawn from the provisions of section 55, prescribing “cost of acquisition” of bonus shares as Nil for the purposes of computation of capital gains tax. Thus, in view of the above position, the CBDT has, in exercise of its powers under section 119, clarified that additional income-tax under section 115R(2) is to be levied on income distributed by way of dividend to unit-holders of mutual fund or specified companies. Further, it is specifically clarified that receipts from redemption/repurchase of units or allotment of additional units by way of bonus units would not be subject to levy of additional income-tax thereunder.

(b) Section 115-S: This section provides that if the person responsible for making payment of the income distributed by the specified company or a Mutual Fund and the specified company or the Mutual Fund, as the case may be, fails to pay the income-tax to the credit of the Central Government within the time allowed under section 115-R, he or it shall be liable to pay simple interest at the rate of 1% for every month or part thereof on such amount of tax which has not been paid or was not paid in time.

(c) Section 115-T: This section provides that if the person responsible for making payment of the income distributed by the specified company or a Mutual Fund and the specified company or the Mutual Fund, as the case may be, fails to pay the income-tax to the credit of the Central Government, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable and all the provisions of this Act for the collection and recovery of income-tax shall apply.

Specified company, for the purpose of section 115-S and 115-T, means specified company as referred to in section 2(h) of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002.

The expression “Mutual Fund”, “open-ended equity oriented fund” and “Unit Trust of India” have been defined for the purposes of the newly inserted Chapter XII -E of the Income-tax Act in the Explanation as follows:

(a) “Mutual Fund” means a Mutual Fund specified under clause (23D) of section 10;

(b) “Equity oriented fund” means –

(i) the Unit Scheme, 1964 made by the Unit Trust of India; and

(ii) such fund where the investible funds are invested by way of equity shares in domestic companies to the extent of more than 65% of the total proceeds of such funds, provided that the percentage of equity share holding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;

(iii) “Unit Trust of India” means the Unit Trust of India established under the Unit Trust of India Act, 1963.