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FM Nirmala Sitharaman proposed the addition of Section 194K in the Finance Act during the Budget 2020. This section includes a tax deduction on the amount paid on the units of mutual funds, without a limit, to any resident individual. Let’s discuss Section 194K in terms of:
In general, an individual can earn 2 types of income by investing in mutual fund units. They are:
|Sl.No.||Income Type||Chargeability to Tax|
Current Regime: Capital gains
are taxable in the hands of the taxpayer. Any long-term capital gains
earned from the equity-oriented mutual funds will be taxed at the rate
of 10% if the gains exceed Rs 1 lakh in a year.
Similarly, any short-term capital gains earned from the mutual funds, subject to STT, will be taxed at the rate of 15%.
New Regime: A mutual fund is not liable to deduct TDS on capital gains arising on redemption of units by unitholders.
Current Regime: Tax on the dividend (DDT) which is paid by the Fund Houses (Asset Management Company) on behalf of the investors.
New Regime: DDT has been abolished as per the Budget 2020; from FY 2020-21, dividend income will be taxable in the hands of the receiver/investor.
A new provision, Section 194K, was introduced in the Finance Bill 2020, effective from 1 April 2020. This new section withdraws the exemption in respect of income from units of mutual funds by abolishing Section 10(35). As per Section 194K, any person responsible for paying an income to a resident with respect to:
Under the current income tax laws, dividends were taxed twice. Initially, tax was imposed when a company would pay a dividend to an asset management company (AMC). The second imposition was when the AMC would distribute its profits to the unitholders.
An investor can either invest back into the fund or earn dividend income. If he chooses to earn dividend income then the AMC will again be required to pay DDT on the distribution of dividend. When it comes to the new tax regime, DDT is abolished and only AMC is required to deduct TDS @ 10% on the distribution of dividend, provided that the dividend paid per recipient exceeds Rs 5,000 in an FY.
TDS under Section 194K is not required to be deducted in the following cases:
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 deduction of TDS 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 hands of the taxpayer.
To sum up, the new provisions introduced by Budget 2020 has shifted the burden of payment of tax on dividend income from the distribution company to the recipient of such dividend income.