Section 194K TDS ON INCOME FROM MUTUAL FUND UNITS

Earlier, as per section 10(35), the income from the units of mutual funds was exempt. However, in the Finance Bill, 2020, the government has introduced a deduction of TDS on Income from mutual fund units.

Now, as per section 194K of the Income Tax Act, 1961, the person making dividend payment on the mutual fund shall deduct TDS @10% if the resident investor’s dividend income exceeds INR 5,000 in a financial year.

Section 194K was effective from 1 April 2020 and hence applicable from FY 2020-21 onwards.  

Need of Section 194K to deduct TDS on dividend income from Mutual Funds

Before section 194K, there was double taxation on dividend income. Firstly, the dividend was paid when the companies pay to the mutual fund companies (asset management companies) and then again when the mutual fund companies pay the dividend to investors; then they have to pay tax as Dividend Distribution Tax (DDT).

Now, after the introduction of section 194K, the DDT has been abolished, and only mutual fund companies are liable to deduct TDS from the investor’s dividend incomes.

Scope of Section 194K

As per Section 194K, any person responsible for paying an income to a resident with respect to:

• Units of a Mutual Fund as per Section 10(23D)
• Units from the Administrator
• Units from a specified company shall be liable to deduct TDS under section 194K.

So, we can say here, 

Mutual Fund distributing dividends to the investors shall be “Deductor.” They shall be liable to deduct and deposit TDS on such dividends to the government. And, resident investors earning dividend income on such mutual funds shall be “Deductee”, and they will receive the amount after TDS under Section 194K.

Note: NRI investors/shareholders are already covered under Section 195.

Threshold limit to deduct TDS under section 194K

If the deductor is making payment exceeding Rs 5000, then he shall be liable to deduct TDS. However, the TDS shall not be deducted in the following cases:

Exceptions to deduct TDS under section 194K

• The income arises from the capital gain,
• If the dividend income is up to Rs 5,000 in a financial year.

TDS rate under section 194K

In the case of resident

TDS rate under section 194K shall be @10%. If the payee doesn’t provide the PAN details, then TDS shall be deducted @ 20%.

In case of Non-resident

TDS shall be deducted under section 195.

Time of deduction of TDS under section 194K

TDS shall be deducted at the earlier of

• The credit of such income to the payee’s account, or
• At the time of making payment

TDS certificate and TDS return under section 194K

After depositing TDS to the government, the deductor shall file TDS return in Form 26Q – Quarterly at the TRACES portal.

Deductor shall download Form 16A from the TRACES portal and issue Form 16A (tax credit certificate) to the deductee. With the help of Form 16A, the deductee can claim the TDS credit at the time of filing the Income Tax Return.