The tax department on Tuesday clarified that the budget proposal of 10 per cent TDS will be applicable only on dividend payment by mutual funds and not on gains arising out of redemption of units.

The budget had scrapped dividend distribution tax paid by companies and mutual funds on dividend paid to unit holders. In place, it proposed to levy tax deducted at source of 10 per cent on dividend paid by a company or fund to its unit holder if the amount of such income exceeds Rs 5,000 in a year.

In a statement, the Central Board of Direct Taxes (CBDT) said queries have been raised if mutual fund would be required to deduct TDS also on the capital gains arising on redemption of units.