Section 194K—Tax Deduction on Income from Mutual Fund Units

Section 194K prescribes TDS deduction at the rate 10% on dividend paid on mutual funds to residents. This resulted in the elimination of double taxation, which happened due to previous tax laws. 

Under the previous laws, tax on mutual fund payout was levied when the company distributed to the AMC(Asset Management Company) and when the AMC distributed the same to the unit holders. 

Let’s discuss Section 194K in detail. 

Types of Income from Mutual Fund Units

In general, an individual can earn two types of income by investing in mutual fund units. They are:

Section 194K

As per Section 194K, any person responsible for paying 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 deduct TDS at the time of credit of such income to the payee’s account or at the time of making payment, whichever is earlier.

Purpose of Section 194K

Under the previous income tax laws, dividends were taxed twice. Initially, a tax was imposed when a company would pay a dividend to an Asset Management Company (AMC). The second imposition of the tax was when the AMC would distribute its profits to the unitholders.

An investor can either choose to invest the profits back into the fund or earn dividend income. If the investor chooses to earn dividend income, the AMC will again be required to pay DDT on the distribution of dividends.

In Budget 2020, DDT is abolished. Now, AMC is only required to deduct TDS at 10% on the distribution of dividends, provided that the dividend paid per recipient exceeds Rs 10,000 in an FY.

Please note-

• TDS should be deducted at 20% if the investor does not provide PAN.
• In the case of NRI investors, TDS should be deducted as per Section 195

What is the rate of TDS?

• The rate of TDS is 10%. 
• The rate of TDS will be 20% in all cases if PAN is not quoted by the deductee.

Exceptions to the section if any

TDS under Section 194K is not required to be deducted in the following cases:

• Tax under section 194K is not required to be deducted at source if the dividend income is up to Rs 10,000 in a financial year.
• Capital gain income is also exempted from the applicability of Section 194K.

Income Tax Provision Before Section 194K

• Under the current regime, the onus of reporting dividend income and capital gains was on individual investors. Dividend income from mutual funds was exempt under Section 10(35).
• On the other hand, there was no provision regarding TDS deduction on any income earned from mutual funds. Only NRIs were subject to TDS. 
• DDT was charged on the company distributing dividends, but the same was tax-free in the taxpayer’s hands.

Interest on non-compliance of TDS provisions

TDS deducted under section 194K shall be deposited to the IT department on or before 7th of the succeeding month. Non deposit of the deducted amount will attract interest at the rate of 1.5% p.m.

Non deduction of TDS shall attract interest at the rate of 1% p.m. Further, disallowance of expense under section 40(a) at 30% on the amount on which TDS had to be deducted, will be made. 

Conclusion

To sum up, this section has shifted the burden of tax payment on dividend income from the company  to the recipient of such dividend income.

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