How TDS on mutual fund income is deducted under Section 194K?

Before March 31, 2020, mutual fund houses collected Dividend Distribution Tax (DDT) on mutual funds. Dividends were tax-free in hands of investors. For equity schemes, at least 11.64% DDT was deducted and submitted to the government. For non-equity funds, the DDT was 29.12% for individual investors.

Section 194K was introduced in the Budget 2020 with intent to tax income earned through mutual funds. Under this section, those paying this income are responsible to deduct TDS (tax deducted at source) on the amount paid on the units of mutual funds without a limit to any resident.

At the outset it begs mentioning that income made through mutual funds is taxed in two ways: tax on dividends and capital gains. TDS is applicable on dividend pay-out, dividend reinvestment and dividend transfer plan. All equity and non-equity schemes declaring dividends are subjected to TDS.

For long-term capital gains earned from equity-oriented mutual funds, 10% tax is applicable if gains exceed Rs 1 Lakh in a year. For short-term capital gains, the tax rate is 15%. However, this section does not obligate mutual fund to deduct TDS on capital gains, arising on redemption of units by unit holders. In other words, capital gains are not subject to TDS cut for domestic investors.

 

 See also: Section 194 of income tax: TDS on dividend

What is Section 194K of the I-T Act?

Section 194K of the I-T Act says that a person responsible for paying any income to a resident with respect to units of a mutual fund shall, at the time of credit of such income to account of payee, deduct income tax at the rate of 10%. The payer is obliged to deduct 10% TDS at the time of credit of such income to the payee’s account exceeding Rs 5,000.

According to the Central Board of Direct Taxes, a mutual fund must deduct 10% TDS only on dividend payment. No tax is required to be deducted on income, which is capital gains. With coming into effect, Section 194K would stop the exemption on income from units of mutual funds enjoyed earlier under Section 10(35).

see also about: 206cr of income tax act

How much TDS is to be deducted?

While the TDS rate in normal situations is 10%, rates are prescribed at 20% if the investor does not provide PAN. For NRI investors, TDS is deducted under Section 195.

know about: 115baa of income tax act

How to save TDS?

In case your income tax liability is expected to be NIL for the financial year, you can submit Form 15G of Form 15H to request NIL, or low rate of TDS. This option is, however, available only for resident Indians, and not to non-residents. A resident below 60 years can submit Form 15G to claim less tax. In case of resident above 60 years, Form 15H is applicable.

These forms available on websites of mutual funds, registrar, and transfer agents. Further, you should fill and submit these forms every year in case you want to claim less or NIL TDS.

see also about: 269ss of income tax act

What if you fail to submit Form15G/Form 15H?

You can file your income tax return and claim refund in case the mutual fund house has already deducted the TDS.

all about: sec 56 2 x of income tax act

FAQs

When was Section 194K introduced?

Finance Minister Nirmala Sitharaman has proposed to introduce the Section 194K in Finance Act 2021, during the presentation of Budget 2020.

What is Section 194K of Income Tax Act?

Under this section, dividends distributed by mutual funds are subject to 10% TDS as of 2020. The TDS applicability arises only for dividend income above Rs 5,000 in a financial year.

Is Section 194K applicable on repurchase, or redemption of mutual fund units?

No, Section 194K only pertains to dividend and not on repurchase, or redemption of units.

When is the TDS provision on mutual fund income applicable?

TDS is applicable on all dividend options. These include dividend pay-out, dividend reinvestment, or dividend transfer plans. Further, all equity and non-equity schemes, declaring dividends are subjected to the TDS rule under Section 194K.

Is TDS deducted irrespective of income from mutual fund unit value?

No, TDS is not deducted if the dividend income is up to Rs 5,000 in a financial year.

Do NRIs have to pay capital gains tax on mutual fund income?

NRIs should pay 30% TDS in case of mutual fund income, qualifies to be short-term capital gains. It is 20% with indexation in case of long-term capital gains.