Section 194K-Tax Deduction on Income from Mutual Fund Units
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:
Types of Income from Mutual Funds Units
| Sl.No. | Income Type | Chargeability to Tax |
| 1. | Capital Gains: | 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 revenues 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. |
| 2. | Dividend | Current Regime: Tax on the dividend (DDT), 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. |
Scope of Section 194K
A new provision, Section 194K, was introduced in the Finance Bill 2020, effective from 1 April 2020. This new section withdraws the exemption regarding income from units of mutual funds by abolishing Section 10(35). As per Section 194K, any person responsible for paying a payment to a resident for:
- Units of a Mutual Fund as per Section 10(23D)
- Units from the Administrator
- Units from a specified company at the time of credit of such income to the payee’s account exceeding Rs 5000 or at the time of making payment, whichever is earlier, shall deduct TDS @10%.
Purpose of Section 194K
Under the current income tax laws, dividends were taxed twice. Initially, the tax was imposed when a company would pay a premium 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, the AMC will again be required to pay DDT on the distribution of dividends. When it comes to the new tax regime, DDT is abolished, and only AMC is required to deduct TDS @ 10% on the distribution of dividends, provided that the dividend paid per recipient exceeds Rs 5,000 in an FY.
Exceptions to the section, if any.
TDS under Section 194K is not required to be deducted in the following cases:
- Tax @ 10% is not required to be deducted at source if the dividend income is up to Rs 5,000 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.
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Posted by Aashima
Team TaxaJ
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