TDS Section 194K- Income from Mutual Funds

Section 194K - TDS on Income from Mutual Funds

The section 194K of Income-tax Act, 1961 was omitted from the act in the year 2016 to provide advantages to shareholders and increase liquidity in their hands. However, to maintain the same advantage a new tax regime has been re-introduced in the year 2020.

Table of Content:

Old Tax Regime:

In the Finance Act, 2004, Former finance minister Jaswant Singh, introduced the Securities Transaction Tax (STT) an efficient way of collecting taxes on financial market transactions. This was to catch some taxpayers evading tax on capital gains by not disclosing the gain on the sale of financial instruments.

New Tax Regime:

In The Finance Bill, 2020 Finance minister Nirmala Sitharaman has proposed to abolish the existing tax regime of dividend distribution tax and bring in section 194K. From now onwards, the dividend income shall be taxable in the hands of investors. Honourable Finance Minister re-introduced section 194K w.e.f. 01.04.2020 for deduction of tax on income in respect of units of Mutual funds.

What is the rate of TDS u/s 194K

CBDT issued a clarification that TDS of 10% will be applicable only on dividend income earned by investors in mutual funds and capital gain on sale of mutual funds is not covered in this section and shall have no impact on the pre-existing law on the same.

Hence, in other words, we can conclude that TDS is required to be deducted on dividend payment by mutual funds only and not on the gain arising out of redemption of units.

Who’s responsible to deduct TDS under section 194K?

Any person who is responsible for paying to a resident any income (dividend can be interim or annual) in respect of

• Units of a Mutual Fund; or

• Units from the Admin of the specified undertaking; or

• Units from the specified company are required to deduct the TDS at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode.

Time of Deduction

TDS is required to be deducted at the time of credit of income to the account of the investor or at the time of payment thereof by any mode, whichever is earlier.

When a payer credited such income to any other account with an undetermined name or whether called suspense account or by any other name, it is considered as deemed income and TDS required to be deducted.

A person paying dividend income to an investor is required to deduct the TDS at a fixed rate of 10% on income credited or paid by him only if such payment exceeds the threshold limit.

TDS is required to be deductible if the aggregate amount of such income which is credited to the investor during the financial year exceeds INR. 5,000/-

That means no TDS shall be deducted for an amount that does not exceed the threshold.

Consequences for Non deducting or delay in depositing TDS

Any contradiction with law attracts a penalty. Similarly, in this case, if tax is not deducted or delayed, the following shall be applicable:

• Non- deducted TDS: Interest @ 1% of the amount from the date on which tax was to be deductible till the date on which such tax is deducted for every month or part of a month.

• Non- Payment of TDS: Interest @ 1.5% of the amount of tax from the date on which taxes were deducted till the date on which tax was paid to Government for every month or part of a month.

• Non deducted or NON-payment: Disallowance of 30% of expenditure made to residents as per Section 40(a)(ia).

• Non-deducted or Non-payment: Penalty of an amount equal to tax not deducted or paid could be imposed under section 271C.

TDS Return and Certificates

• The statement of return in Form No. 26Q is required to be filled quarterly.

• The TDS certificate i.e. Form No. 16A is required to be issued quarterly within 15 days from the due date for furnishing the quarterly TDS statements

Threshold Limit

Tax shall be deducted u/s 194K if the amount exceeds Rs. 5000.