NEW DELHI, May 7: Union finance minister P Chidambaram has amended Section 32 (3) of the Unit Trust of India Act which defined all payouts made by the trust as dividend income. Instead, payments made by the UTI to its subscribers will now be termed as "income" and will be taxed accordingly.

UTI payouts will continue to be governed by Section 80L of the Income Tax Act, under which incomes from UTI schemes are exempt to the extent of Rs 15,000. Beyond this limit, the normal rates of taxation will apply.

Finance ministry sources clarified that all payouts by other mutual funds, registered under Section 10 (23)D of the IT Act, will also be defined as "income" and will be eligible for 80L exemption limit of Rs 15,000.

The amendment follows a strong representation made by the UTI chairman before the Central Board of Direct Taxes (CBDT), claiming that the provision of exemption of double taxation on dividend income as applicable to other corporates was not being extended to the UTI, but for the 80L benefit.

This will harm the interest of the trust, the chairman is reported to have said.

Instead of amending 80L and fully covering the UTI under the avoidance of double taxation on dividend income clause, the ministry has decided to redefine all UTI payouts as "income".

The trust will benefit to the extent that it will not have to pay a 10 per cent tax on distributed profits as is applicable to other corporates whose dividend is exempt from tax at the hands of the receiver. What is more, under Section 10 (23)D of the IT Act, UTI and other mutual funds are exempt from income tax.

Both these benefits as well as the deduction under section 80L will offset the negative impact of UTI and other mutuals not getting the full tax exemption on dividend income, finance ministry sources said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.