Explanation
Section 115R has evolved significantly over the years. Originally it imposed a distribution tax on mutual funds distributing income, similar to DDT for companies. Over time, the Finance Act 2020 shifted the tax burden for most equity and debt mutual fund dividends to investors — mutual funds no longer pay a distribution tax on dividends to non-corporate investors for most schemes; instead, TDS at 10% is deducted under §194K when dividend exceeds ₹5,000 in a financial year per investor per scheme. The dividends are taxable in investors' hands as 'Income from Other Sources' at applicable slab rates. However, §115R continues to apply at higher rates for income distributed by money market funds and liquid funds (investing predominantly in money market instruments with residual maturity below 91 days), where the distribution tax rate is 25% (plus surcharge and cess) for individuals and HUFs, and 30% for others. The applicable rates, thresholds, and covered fund types under §115R have been amended multiple times — the current applicable rates must be verified from the CBDT notification in force. For most regular mutual fund investors, the §194K TDS and slab-rate taxation is the operative framework. Verify on the income-tax portal before filing.
Related terms and sections
Confidence: medium. Verify against primary sources (incometaxindia.gov.in, cbic-gst.gov.in, mca.gov.in) before filing.