Budget 2025 expectation: The Association of Mutual Funds in India (AMFI) has proposed a request to amend the current provisions regarding the surcharge on Tax Deducted at Source (TDS) for Non-Resident Indians (NRIs). The Budget 2025 proposal aims to prescribe a uniform surcharge rate of 10% on TDS, applicable to dividend payments from mutual fund units under Section 56 and capital gains under Sections 111A and 112A arising from the redemption of mutual fund units.This change is expected to address the challenges faced by NRI investors, provide uniformity across mutual funds in their compliance with TDS obligations, and simplify the TDS compliance process for mutual funds. The proposal highlights that the final surcharge rate for NRIs will depend on their total income under the heads “Income from Capital Gains” and “Income from Other Sources” (dividends) in their income tax return. By rationalizing the surcharge rate, AMFI believes tax administration will be simplified without any revenue loss for the government.

Currently, under sections 195 and 196A of the Income Tax Act, 1961, mutual funds are required to deduct TDS on capital gains and dividends paid to NRI investors. The surcharge on TDS is calculated based on the total income of the investor, with rates ranging from 10% to 37%, depending on income slabs. In addition, a 4% Health and Education Cess is levied on the base tax and surcharge.

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However, mutual funds face difficulties in determining the appropriate surcharge rate at the time of dividend payment or redemption because the total income of NRI investors is unknown in advance. Mutual funds may make multiple payments throughout the year, but the income and redemption amounts vary, making it impossible to estimate the NRI’s income slab accurately. This uncertainty has led to challenges, including the risk of mutual funds being held liable for any shortfall in TDS during assessment.

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To avoid this confusion, some mutual funds have been applying the maximum surcharge rate of 37%, while others apply the applicable surcharge based on the actual transaction amount. This lack of uniformity has led to complaints from NRI investors, urging for a consistent surcharge rate across all mutual funds.

AMFI’s proposal seeks to simplify these issues by introducing a single, flat surcharge rate, ensuring greater consistency, reducing confusion, and easing the TDS compliance burden on mutual funds while benefiting NRI investors.