Over 46 million equity-linked retail investors in mutual fund industry may be in for a jolt if the goverment goes ahead with its plans to tax dividends at a hefty 10 percent from next fiscal year.

This move is likely to see an outgo of around Rs 740 crore per annum from these investors, say experts.

However, industry lobby Amfi expects the government to heed its demand to shelve the plan and has already represented the matter to the finance ministry.

The fear comes after the tax department recently notified the amended section-115BBDA of Income-Tax Act 2017, which seeks to tax dividend from MF investments into equities at 10 percent if the total income of an assessee exceeds Rs 10 lakh, including dividends distributed or paid by companies.

The equity linked MF industry is around Rs 7 trillion and companies on an average pay 1.4 percent annually, which totals Rs 7,400 crore, which will be taxed at 10 percent.

If the plan goes get through then it will lead to an additional tax burder of around Rs 740 crore from next April, say industry experts.

At this moment, investment is not taxable as MFs enjoy exemption under section 1023D of the I-T Act.

The burden will mostly be on retail investors as they are the drivers of this segment.

Until now, individuals, firms and Hindu undivided families earning dividends from domestic companies in excess of Rs 10 lakh in a financial year are subject to 10 percent taxation if their income from investments exceeds Rs 10 lakh. The idea is to nab company promoters and HNIs.

However, from the next fiscal year, this tax has been extended to all assesses, except those entities specified as domestic companies, with a view to plug a loophole whereby some trusts created by promoters are getting the exemption.

According to Amfi data, the number of retail investor accounts comprising equities, equity-linked saving schemes and balanced funds rose to 4.60 crore in May from 4.4 crore in March 2017.

When contacted, an Amfi official said they have already appealed to the finance ministry not to tax retail investors as it will be hurt market sentment.

"We have already represented the matter to the finance ministry and many favourable opinions have come in from some leading CA firms, and so we hope that the proposal to tax dividend will not come through," an Amfi official said.