Section 194K Of The Income Tax Act: TDS On Income From Mutual Funds

Income Tax

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

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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.