Income Tax - Distributed Income - Section 115R - No tax on redemption, bonus - MF units -CBDT Clarifies
SECTION 115R of the Income-tax Act, 1961 provides for levy of additional income-tax on distributed income to unit holders (‘additional income-tax').
It has been reported that some field authorities are taking a view that mutual funds/specified companies are required to pay additional income tax under sub-section (2) to section 115R of the Act not only on income distributed by way of dividend but also on payments made at the time of redemption/repurchase of units as well as at the time of allotment of bonus units to existing investors.
Board has examined the issue and notes:-
Sub-section (2) of section 115R of the Act provides that any amount of income distributed by (i) a specified company, or (ii) a mutual fund to its unit holders shall be chargeable to tax and such entities shall be liable to pay additional income tax on such distributed income at the rates prescribed therein. However, redemption of units or repurchase of units would not attract levy of tax under sub-section (2) to section 115R of the Act as such income is not of the nature of income ‘distributed” to the unit holders and hence lies outside the purview of this section.
Further, the income so distributed by the mutual fund or specified company in the hands of the recipient unit holder is specifically exempt from tax under section 10(35) of the Act.
Similarly, bonus units at the time of issue would not be subjected to additional income tax under section 115R of the Act since issue of bonus units is not akin to distribution of income by way of dividend.
So, the CBDT clarifies that additional income-tax under sub-section (2) of section 115R of the Act is to be levied on income distributed by way of dividend to unit-holders of mutual funds or specified companies and receipts from redemption/repurchase of units or allotment of additional units by way of bonus units would not be subjected to levy of additional income tax under that section.
CBDT Circular No. 6/2014 in F. No. 225/182/2013-ITA.II., Dated: February 11, 2014