Section 194K | TDS on Mutual Fund

Overview

Mutual funds have become an increasingly popular investment choice in India due to their potential for generating attractive returns. However, investors often wonder about the tax implications on income earned from these funds. One crucial aspect of taxation is TDS (Tax Deducted at Source). The Indian Income Tax Act, under Section 194K, mandates TDS on income derived from mutual fund units. This article explains the nuances of TDS under Section 194K, its applicability, rates, and exemptions.

What is Section 194K, TDS on Mutual Fund?

Section 194K of the Income Tax Act, 1961 was introduced through the Finance Act, 2020 to streamline the taxation of income from mutual funds, particularly after the abolition of Dividend Distribution Tax (DDT). Before this, there was no clear provision for TDS on mutual fund income, creating confusion among investors and complicating tax collection for the government. The introduction of Section 194K aimed to simplify this process by ensuring that TDS is deducted at source on dividends from mutual funds, making it easier for investors to comply with tax regulations.

Section 194K of the Income Tax Act, 1961, is specifically designed to address the tax treatment of dividend income earned from mutual funds.

Applicability of TDS u/s 194K

Section 194K of the Income Tax Act shall apply to every person, i.e., Individual, HUF, Firm, Company, etc. responsible for paying income arising on units of mutual funds.

Basically, this section was introduced for “Mutual Fund Providers”

Mutual Fund Providers: The mutual fund houses or asset management companies (AMCs) are responsible for deducting TDS @10% at the time of income distribution (Dividend income on mutual funds units), if the dividend income exceeds ₹5,000 in the financial year.

Threshold limit and TDS Rate u/s 194K

Threshold limit:

Under Section 194K of the Income Tax Act, 1961, the threshold limit for TDS on dividend income from mutual funds is ₹5,000 per financial year.

TDS Rate u/s 194K

Here’s a detailed breakdown of the TDS rates under Section 194K:

Resident investors

• 10% on the dividend income if the total dividend amount paid to the investor exceeds ₹5,000 in a financial year.
• If the total dividend paid to an individual or HUF during the financial year is ₹5,000 or less, no TDS will be deducted.

Non-resident / Foreign investors

• For non-residents or foreign investors, the rate of TDS on dividend income is generally 20% (plus applicable surcharge and cess), subject to provisions of the Double Taxation Avoidance Agreement (DTAA) between India and the investor's country of residence, which may reduce the TDS rate.


• Note: TDS will be charged @ 20% in all the cases, if the payee fails to furnish PAN details to the payer.

When to deduct and deposit TDS u/s 194K?

Time of Deduction:

TDS under section 194K is required to be deducted at the earlier of the following:

• At the time of credit of such income; or,
• At the time of payment of such sum in cash or by cheque or by any other mode.

Time to Deposit:

TDS on Mutual Fund which is deducted u/s 194K and is required to be deposited to the central government. Time to deposit TDS u/s 194K is given below:

For example, TDS is deducted on 15th December and needs to be deposited on or before 7th January. Tax is deducted on 21st March; needs to be deposited on or before 30th April.

Exemptions u/s 194K, TDS on Mutual Fund

There are some exemptions under Section 194K where TDS is not applicable or can be reduced:

• Small Dividend Income: If the total dividend income from mutual funds is less than ₹5,000 in a financial year, no TDS is deducted.
• Tax Exemption for Certain Investors: Certain entities, like retirement funds, pension funds, and charitable institutions, are exempt from TDS under Section 194K. They must submit a valid self-declaration to the mutual fund provider for claiming exemption.
• Lower or Nil TDS Certificate: Investors who are liable for a lower or nil rate of TDS due to certain conditions can apply to the Income Tax Department for a lower deduction certificate under Section 197.
• Capital Gains income: Capital gains income arising on ‘redemption of units of mutual funds’ are not subjected to TDS under section 194K.

Consequences of Non-compliance u/s 194K

Following are the consequences and penalties for non-compliance with section 194K:

Why choose Bizfoc for TDS?

At Bizfoc, we specialize in providing you the best accounting services in filing your TDS. Here are the reasons why we are known for our services to our clients on filing TDS:

• Assist in suggesting the right documents for TDS filing.
• Providing valuable insights on sections of TDS computations.
• Prescribe forms as per the necessity.
• Helps in accurate computations for TDS computations and returns.
• Tailored advice and guidelines for TDS filing.

In general, we assist the client to solve their queries and doubts regarding the documentation, procedures, and fees for filling out the form. Other than making your filing successful, we help you make a better decision by covering every aspect of what you actually need to get your TDS.

Conclusion

TDS under Section 194K provides a structured mechanism for the taxation of income from mutual fund units, ensuring that the government collects tax at the source of income distribution. By understanding the applicability, rates, and exemptions, investors can better plan their mutual fund investments and avoid unnecessary tax deductions. Whether you are a resident or non-resident investor, it is important to stay informed about the latest tax provisions and TDS rules to maximize your returns and comply with tax regulations.

Frequently Asked Questions