Section 194K Of The Income Tax Act: TDS On Income From Mutual Funds
The government declared the abolition of the Dividend Distribution Tax through the Union Budget of 2020. Instead, it introduced Section 194K, under which dividend income from mutual funds would become taxable in the hands of the receiver.
Here is a detailed discussion on Section 194K of the Income Tax Act.
Section 194K: What is it?
Section 194K consists of provisions regarding the deduction of TDS on income that a shareholder obtains through dividends from mutual funds. As per this section, the government will withdraw all exemptions on income from mutual funds that were applicable under Section 10(35).
According to Section 194K of the Income Tax Act, any person paying an amount to a resident with regard to the following will have to make a TDS deduction at a 10% rate if the amount exceeds Rs. 5,000:
- Units from the administrator
- Mutual fund units under Section 10(23D) or
- Units from a particular company
Types of Income from Mutual Funds
As an investor, you can earn two types of income from mutual fund investments. These are dividends and capital gains. The tax charged on each of these incomes is as below:
Dividend
Previously, fund houses or the Asset Management Company had to pay the dividend distribution tax on the dividend they paid to investors. However, from FY 2020-21, investors’ dividend income that exceeds Rs. 5,000 in a financial year is liable to TDS deduction at a 10% rate.
Capital Gains
Mutual fund investors have to pay capital gains tax upon the sale of their units. Investors receiving long-term capital gains of more than Rs. 1 lakh from equity-oriented mutual funds have to pay 10% tax. Moreover, short-term capital gains from equity-oriented mutual funds are taxed at 15%.
The introduction of Section 194K removed TDS deduction by a fund house on capital gains that an investor obtains through the redemption of units.
Also Read – Taxation Of Dividend Income
About TDS Deduction on Income from Mutual Funds
Here are some crucial aspects that taxpayers need to know about TDS deduction on income from mutual funds u/s 194K:
Deductor and deductee
Mutual fund companies providing dividends to investors are eligible to make TDS deductions at specified rates. They have to submit this TDS and then file a TDS return within a particular timeframe on TRACES.
Residents investing in mutual funds will receive dividend income after TDS deduction on the amount.
Time of payment
The mutual fund house will deduct the TDS either at the time of credit of this amount or at the time of payment, whichever would be earlier. TDS deduction would take place even if the payee credits this amount to a ‘suspense account’.
TDS certificate
The deductor of TDS has to issue Form 16A to the investors as evidence of TDS deduction and deposition to the government. The deductor can get Form 16A from TRACES. With this form, you can claim a tax credit for TDS deduction while filing your IT return.
TDS return
Once the mutual fund house makes necessary TDS deductions and deposits them to the IT department, they have to file Form 26Q. Here they have to mention details regarding dividend payments. After filing this report, they have to provide Form 16A to deductees.
Deduction Rates
As per provisions of Section 194K of the Income Tax Act, a deductor will make TDS deductions at a 10% rate in case the dividend you get exceeds Rs. 5,000. However, if you do not provide a PAN, TDS will get deducted at a rate of 20%.
Also Read – Capital Gain Calculator
Final Word
With the newly introduced Section 194K, the burden of paying taxes on mutual fund income shifted from AMCs to investors. Make sure to have a clear idea of the provisions of Section 194K to avoid confusion on the taxation of dividends earned from mutual funds.
Frequently Asked Questions
For delay in TDS deduction or tax deposition to the government, the consequences can be as follows:
Disallowance of any expenses as stated in Section 40(a)(i)
Penalty interest of 1% every month or part of a month on the TDS amount from the due date of payment to the actual date of payment
A penalty that is equal to the TDS amount can be levied as per Section 271C
Yes, as per provisions of Section 195 of the IT Act, an NRI investor will receive dividend income from mutual funds after the deduction of TDS. In the case of dividend income from equity mutual funds, a TDS deduction of 20% on dividends is applicable.
CBDT has already clarified that TDS deduction as per Section 194K will be applicable only on the income one receives from dividends. So, a fund house will not make any deduction on incomes that fall under the ‘Capital Gains’ head.
A mutual fund house cannot make TDS deductions under Section 194K of the Income Tax Act in the following cases:
> TDS deduction will not take place in case your dividend income from mutual funds does not cross Rs. 5,000 for a financial year.
> Any income in the form of capital gains is free of tax deduction under Section 194K.
As a taxpayer, you can submit Form 15H or Form 15G to prevent TDS deduction under Section 194K. However, the tax on your total income (including dividend income from mutual funds) has to be nil.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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