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Section 194K Payment of income for units of a mutual fund, for example- dividends

FM Nirmala Sitharaman suggested adding Section 194K to the Finance Act in Budget 2020. This section covers tax deductions on mutual fund units paid to any resident individual, without a limit. Let's talk about Section 194K in terms of:

Mutual Fund Income Types 

Two types of income can be earned from mutual fund units: 

No.

Income Type

Tax Considerations

1

Dividend

Tax is levied on dividends by fund houses. However, DDT has been abolished since Budget 2020. Starting FY 2020-21, dividends are taxable to the receiver. Mutual funds must deduct TDS on dividends over Rs 5,000 as per Section 194K in Finance Act 2021.

2

Capital Gains

Capital gains are taxable to the taxpayer. Long-term capital gains from equity-oriented mutual funds are taxed at 10% if over Rs 1 lakh/year. Short-term gains from these funds are taxed at 15% if subject to STT. Section 194K in Finance Act 2021 states TDS is not needed on capital gains from unit redemptions.

Section 194K removes the exemption on income from mutual fund units by abolishing Section 10(35). It entails that any person paying a resident regarding: 

  • Mutual fund units as per Section 10(23D)
  • Units from the administrator
  • Units from a specific company

Must deduct TDS at 10% when such income exceeds Rs 5,000 is credited to the payee’s account or at the payment time, whichever is earlier. 

Purpose of Section 194K

Previously, dividends were double-taxed. First, a company pays a tax when paying a dividend to an Asset Management Company (AMC). Secondly, the AMC was taxed when distributing profits to unitholders. 

An investor can reinvest the profits or earn dividend income. If opting for dividend income, the AMC had to pay DDT on the dividends distributed. 

With Budget 2020, DDT is scrapped, and AMC only needs to deduct TDS at 10% on dividends distribution, if the dividend paid per recipient exceeds Rs 5,000 in a fiscal year. 

Note- 

  • If the investor doesn't provide PAN, TDS should be deducted at 20%.
  • For NRI investors, TDS should be deducted as per Section 195

Exceptions

No TDS required under Section 194K in these cases:

  • No 10% tax deduction if the dividend income is up to Rs 5,000 in a year.
  • Capital gain income is exempted from Section 194K.

Previous Income tax provision

Previously, individual investors reported dividend income and capital gains. Dividend income from mutual funds was exempt under Section 10(35). There was no provision for TDS deduction on mutual fund income, except for NRIs. DDT was charged on the company distributing dividends, and it was tax-free for taxpayers. 

Conclusion

Budget 2020 provisions shifted the tax payment responsibility on dividend income from the company to the recipient. 

 

The Tax Heaven

Mr.Vishwas Agarwal✍📊, a seasoned Chartered Accountant 📈💼 and the co-founder & CEO of THE TAX HEAVEN, brings 10 years of expertise in financial management and taxation. Specializing in ITR filing 📑🗃, GST returns 📈💼, and income tax advisory. He offers astute financial guidance and compliance solutions to individuals and businesses alike. Their passion for simplifying complex financial concepts into actionable insights empowers readers with valuable knowledge for informed decision-making. Through insightful blog content, he aims to demystify financial complexities, offering practical advice and tips to navigate the intricate world of finance and taxation.

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