Section 194K

What Is Section 194K Of Income Tax Act?

As part of Budget 2020, Dividend Distribution Tax (DDT) was removed. This change took effect on April 1, 2020, or FY 2020–21. As result, dividends paid on equity shares & mutual funds that were formerly free from taxation under Section 10(35) of Income Tax Act are now taxable at slab rates.

It is taxable in hands of shareholder. Since income would be taxable in hands of shareholder, TDS would be necessary. Minister of Finance established new Section 194K TDS to allow TDS to be deducted on mutual funds.

Types Of Income From Mutual Funds?

1) Capital Gain: Under government's income tax legislation, capital gains would be subject to taxation at taxpayer's hands. Profits from equity-oriented mutual funds are subject to 10% taxation if they represent long-term capital gains of more than one lakh within calendar year.

Any short-term capital gains from equity-oriented mutual funds that qualify for STT are probably subject to 15% tax rate.

Nonetheless, mutual fund is not required to deduct TDS on capital gains from holder's redemptions under Section 194K.

2) Dividend: Current income tax legislation levies tax on dividends that fund houses or AMCs pay to investors on their behalf.

According to 2020 budget, DDT is no longer legal. recipient would be liable for taxes on dividend income. Mutual funds are required by Finance Act's new TDS Section to withhold TDS when paying dividends to unit holders that exceed Rs. 5,000.

Who Is Required To Deduct TDS Under Section 194K?

Anybody who is in charge of paying resident any income related to following may deduct TDS when crediting payee's account or settling payment method:

a) Units of mutual funds

b) Particular units within firm.

c) Administrator units belonging to certain project.

Rate Of TDS Under Section 194K

According to section 194K, applicable rate of deduction is 10%. After it is made, TDS deduction will show up in Form 26AS. Investors may file their income tax return if final tax owed is less than what was actually deducted or if there is no overall tax burden.

10% rate is imposed if investor has provided deductor with their PAN & Aadhar number. In event that deductor does not provide PAN or Aadhaar number, applicable rate of TDS is 20%. Higher TDS incidents are rare because opening mutual fund requires providing PAN.

Threshold Limit For TDS Deduction Under Section 194K

Under Section 194K, there are two exceptions to TDS deduction.

• Firstly, if your dividend income is less than ₹5,000, neither fund house nor AMC will deduct any TDS from it.
• Secondly, if your income is from capital gains, either long-term or short-term, there will be no TDS deduction under this section.

Calculation Of TDS Under Section 194K Of Income Tax Act

• Dividends from mutual funds over Rs 5,000 are subject to 7.5% TDS withholding.
• Plans for dividend distribution, reinvestment, & transfer are all governed by TDS.
• For residents or domestic investors, capital gains are not subject to TDS.
• A non-resident individual's short-term capital gains rate is 30%. With indexation, long-term capital gains are subject to 20% tax rate.
• There will be no TDS deduction if individual receiving income submits Forms 15G and/or 15H.

Due Dates For Depositing TDS

Under Section 194K, due dates for depositing TDS on income from mutual funds or specified company shares are as follows:

• Monthly deposits: TDS must be deposited by 7th of following month.
• March deposits: For TDS deducted in March, due date is extended to April 30th.

Timely deposits are essential to avoid penalties & ensure compliance with tax regulations.

TDS Considerations For Mutual Fund Income

Under Section 194K of the Income Tax Act, tax is required to be deducted at source when a resident receives certain income from mutual fund units, most commonly dividend income that crosses the prescribed threshold in a financial year. The provision ensures that tax on mutual fund payouts is collected at the time of payment or credit, rather than waiting until annual filing. 

Here are the key points to understand:

• Which income is covered: Section 194K generally applies to dividend income from mutual fund units (equity or debt), whether it’s paid out or credited to the investor’s account. Capital gains from the redemption or sale of mutual fund units are not subject to TDS under this section and are taxed separately when you file your return.
• Threshold for deduction: TDS is typically deducted only if the aggregate dividend income from a particular mutual fund house exceeds ₹5,000 in a financial year. If the total dividend from that fund house stays below the threshold, no TDS is deducted.
• TDS rate: The standard rate of TDS under Section 194K is 10 per cent of the dividend amount. If the investor has not furnished a valid PAN, a higher rate of 20 per cent may apply.
• When it must be deducted: The payer (usually the Asset Management Company) must deduct tax either at the time of credit to the investor’s account or at the time of payment, whichever is earlier.
• TDS reporting and certification: After deduction, the payer must deposit the tax with the government and issue a Form 16A as a certificate to the investor. The deducted amount also appears in the investor’s Form 26AS for tax credit purposes.

Understanding these considerations helps both mutual fund houses and investors plan and reconcile tax deductions related to dividend income.

Penalties For Non-Deposit Of TDS Under Section 194K

Failing to comply with TDS obligations under Section 194K can attract interest and penalties for the deductor, reflecting the importance of timely deduction and deposit.

Typical consequences include:

• Interest for failure to deduct: If TDS is not deducted when required, interest at around 1 per cent per month or part of a month may be charged from the date on which tax should have been deducted until it is actually deducted.
• Interest for late deposit: If TDS has been deducted but not deposited with the government on time, a higher interest rate — typically around 1.5 per cent per month or part of a month — may be levied from the date of deduction until the date of deposit.
• Late fees: Under GST-like penalty provisions for TDS compliance delays (e.g. Section 234E), a late fee of ₹200 per day may be applicable until the TDS return (such as Form 26Q) is filed.
• Disallowance of expense: For entities paying mutual fund income, failing to deduct TDS can result in disallowance of that expense under Section 40(a)(ia) of the Income Tax Act, negatively affecting taxable profits.
• Penalty under Section 271C: A penalty equal to the amount of TDS that was not deducted or not paid may also be imposed on the deductor.

These measures reinforce compliance by linking sound TDS practices to both timely payment and accurate reporting, and they can lead to real costs if overlooked.

Conclusion

Section 194K of Income Tax Act deals with taxation of dividend income. It mandates withholding tax on dividends distributed by mutual funds & companies. This section was introduced to streamline Indian taxation system & replace Dividend Distribution Tax with more direct approach. According to Finance Act, dividends are subject to withholding tax, aligning with broader taxation laws. This change impacts how dividends are taxed & reported, ensuring compliance within framework of Indian taxation system.