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Section 194K of Income Tax Act

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August 23, 2022

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10 mins read

Section 194K of Income Tax Act – TDS on Income from Mutual Funds Units

Serial No. Contents
1. Introduction of Section 194K of Income Tax Act
2. Purpose of Section 194K of Income Tax Act, 1961
3. Types of Income from Mutual Funds
4. Who is liable to deduct TDS u/s 194K ?
5. TDS Returns and Certificates
6. Verbatim of Section 194K of Income Tax Act, 1961

Introduction of Section 194K of Income Tax Act

The Finance Act, 2020 introduced Section 194K of Income Tax Act, 1961 (hereinafter referred to as the “Act”) which was brought into effect from April 1, 2020. According to this section, income derived from units of mutual funds shall also be liable to deduction of income tax under the Act. Such income is taxable  in the hands of any Resident individual. This provision was introduced in order to remove double taxation. Let’s take a brief look at the various aspects of this concept.

Purpose of Section 194K of Income Tax Act, 1961

Prior to the inclusion of Section 194K,  distribution of dividends to unit holders by the Asset Management Company (hereinafter referred to as the “AMC”)  was liable to pay DDT (Dividend Distribution Tax) as well astax on the dividend distributed by the underlying company to the AMC.To remove this difficulty, DDT has been removed and dividends are being taxed only once, i.e.  TDS is now deducted only at the time of distribution of dividend by the AMC to the unitholders.

Types of Income from Mutual Funds

  • Dividend- Section 194K requires the mutual fund to deduct income tax on dividend distributed to unitholders, provided such income is more than Rs. 5000.
  • Capital Gains- Section 194K does not require a mutual fund to deduct income tax on capital gains arising on redemption of units by unitholders.

Who is liable to deduct TDS u/s 194K?

According to  Section 194K, any person paying dividend to Resident individuals on:

  • Units of a mutual fund as per Section 10(23D)
  • Units from the administrator of the specified undertaking
  • Units from a specified company

, shall be liable for deducting income tax @ 10% at the time of crediting such amount to  the account of the unitholder, or at the time of payment to such unitholder by any mode, if such income is more than Rs. 5000.

Note: If the unitholder fails to produce a valid a PAN Card, the rate of deduction of TDS shall be 20%. In the case the dividend income from mutual funds is paid to NRIs (Non Resident Individuals), TDS shall be deducted according to Section 195 of the Act.

Example 1: If the dividend paid by ABC Mutual Funds Ltd. to Mr. A is Rs. 10,000 in a given Financial Year, then the amount of TDS to deducted before such payment is Rs. 1000 (i.e. 10% of 10,000).

Example 2: If the dividend paid by ABC Mutual Funds Limited to Mr. B is Rs. 4000 in a given Financial Year, then no TDS shall be deducted before such payment of dividend is made.

Explanation to a few terms

Terminology Meaning
Administrator The Administrator as referred to in clause (a) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;
Specified Company A Company as referred to in clause (h) of Section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002
Specified Undertaking Assigned to it in clause (i) of Section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002

TDS Returns and Certificates

The Mutual fund is under an obligation to file TDS return in Form No. 26Q quarterly, and issue TDS Certificate in Form No. 16A, which is required to be issued quarterly, within 15 days from the due date of filing quarterly TDS Return.

Verbatim of Section 194K of Income Tax Act, 1961

For the verbatim of Section 194K, find the link attached below;

Click here for the Verbatim of Section 194K

TDS Sections

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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