Section 194K

Nirmala Sitharaman suggested including Section 194K in Finance Act in 2020 budget. Up to certain level, this condition permits any resident individual to deduct price paid for mutual fund units.

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.

Consequences Of Non-Compliance With Section 194K

• Mutual fund schemes are required to comply with section 194K regulations for all dividend payments. If TDS is not deducted or paid, interest will be charged on investment along with penalty. These details are enumerated here.
• Interest is charged at rate of 1% in event that TDS is not deducted. This interest is charged for each month or portion thereof, starting on day tax was deductible & continuing until tax is really deductible.
• 1.5% interest is charged if TDS is not paid after tax is dedicated. This interest is assessed on monthly or partial monthly basis, starting from date tax was withheld & continuing until tax is paid to government.
• In addition to interest amount, penalty under section 271C is also due for failing to pay or deduct TDS. penalties will be same as TDS that was neither paid to government nor withheld.
• Failure to deduct & pay TDS will also result in disallowance of expenses under section 40(a) (ia).

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.