Section 194K has been inserted with effect from 1st April 2020 by our FM Nirmala Sitharaman. This section of the Income tax act, 1961, includes a tax deduction on the amount paid on the units of mutual fund to a resident individual.
Government has abolished dividend distribution tax (DDT), due to which, now dividend income will be taxable in the hands of the receivers or investors.
In this article, we will be discussing tax provisions related to TDS on income from mutual funds as mentioned in the section 194K of the Income tax act, 1961.
You can get two types of income from a mutual fund;
- Dividend
- Capital gain
This new section 194K requires deducting tax at source (TDS) while distributing dividend exceeding Rs. 5,000 to unit holders. However, this new section 194K of the income tax act, 1961, does not require the deductor to deduct tax at source (TDS) on capital gains arising on redemption of units by mutual fund holders.
As per the provisions of section 194K, any person who is responsible for making payment to a resident of any income in respect of a unit of a mutual fund is liable to deduct tax at source.
When tax will be deducted?
Tax at the rate specified under section 194K will be deducted at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier.
Remember, the mode of payment is not relevant. Cash or by issue of cheque, or draft or by any other mode are covered.
When a payer credited such income to any other account whether called “suspense account” or by any other name, it is considered as deemed income and tax is required to be deducted (TDS) under section 194K.
When tax under section 194K is not deductible?
No tax is deductible where the amount of income from mutual fund as discussed above or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or to be paid during the financial year by the person responsible for making the payment to the account of or to the payee does not exceed Rs 5,000.
This means the maximum ceiling limit specified under section 194K for deducting tax at source under section 194K is Rs 5,000. TDS under section 194K shall be deducted at 10% if the amount is exceeding Rs 5,000.
Tax under section 194K will not be deducted if a declaration is furnished by the mutual fund unit holder in Form No 15G or 15H under section 197A that the tax on his estimated total income of the relevant previous year will be nil. It’s not applicable to a company or firm.
If a nil TDS certificate or lower TDS certificate is issued under section 194 from the assessing officer, then in that case, tax is not required to be deducted under section 194K.
Rate of TDS under section 194K
If all the conditions as mentioned under section 194K are satisfied, then tax at the rate of 10% shall be deducted by the person responsible for making payment.
Surcharge and education cess will not be added to the above rate of tax. This means, deduction of tax at source (TDS) under section 194K is 10%.
If PAN is not furnished, then tax will be deductible at the rate of 20% instead of 10%. Therefore, each mutual fund holder should register their PAN with the mutual fund house to avoid higher rate of tax deduction under section 194K.
In this case, the statement of return in Form No 26Q is required to be filed by the deductor. TDS certificate in form No 16A is required to be issued to the units of mutual fund holders for every quarter within 15 days from the due date for furnishing the quarterly TDS return.
Remember, failure to deduct tax or to remit tax deducted under section 194K to the government account within the stipulated time period will attract interest and penalty.
