INSERTION OF NEW SECTION 194K FOR TDS ON DIVIDEND INCOME IN RESPECT OF UNITS OF MUTUAL FUNDS

Background

1. Existing Tax Regime: How STT came into picture?

a. When some taxpayers started evading tax on capital gains by not showing the details of gain on the sale of stocks

b. The Finance Act, in 2004, introduced the Securities Transaction Tax (STT) as a tool of efficient way of collecting taxes from financial market transactions.

2. New Tax Regime:

a. In The Finance Bill, 2020 government has abolished dividend distribution tax, and now the dividend income will be taxable in the hands of receivers / investors. Honorable Finance Minister in their speech inserted section 194K w.e.f 01.04.2020 for deduction of tax on income in respect of units of Mutual funds.

SECTION 194K:

1. Which type of Income is covered under section 194K?

a) CBDT clarified that TDS will be applicable only on dividend payment & no tax shall be required to be deducted by the mutual fund on income which is in the nature of capital gains.

b) Hence TDS is required to be deducted on dividend payment by mutual funds only and not on gain arising out of redemption of units.

2. Who is responsible to deduct TDS under section 194K?

Any person who is responsible for paying to a resident any income in respect of

a) Units of a Mutual Fund or

b) Units from the Administrator of the specified undertaking; or

c) Units from the specified company,

is required to deduct the TDS at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode.

3. Time of deduction of TDS under section 194K

TDS is required to be deducted:

a) at the time of credit of income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier

b) when payer credited such income to any other account whether called “suspense account” or by any other name, it is considered as deemed income and TDS required to be deducted

4. Rate at which TDS to be deducted under section 194K

Person paying dividend is required to deduct the TDS on income credited or paid by him if such payment exceeds the threshold limit at following rate:

TDS to be deducted

*Section 194K is not applicable for payment of dividend to NRI

5. Threshold Limit for TDS deduction under section 194K

TDS is required to deduct if the aggregate amounts of such income which is credited or paid during the financial year exceeds Rs. 5,000/-

No TDS is required to be deducted for amount which does not exceed five thousand rupees

6. TDS return and Certificates

a) The statement of return in form No. 26Q is required to be filled quarterly.

b) The TDS certificate i.e Form No. 16A is required to be issued quarterly within 15 days from the due date for furnishing the quarterly TDS statements

7. Consequences for Non deducting / delay in depositing TDS

Failure to deduct the TDS or to remit tax deducted in the governments account within stipulated time limit would attract interest and penalty as follows

a. Disallowance of Expenditure as per Section 40(a)(ia)

b. Interest @ 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted

c. Interest @ 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid

d. Penalty of an amount equal to tax not deducted or paid could be imposed under section 271C

8. Comparison of Existing & New Regime: 

Existing Regime New Regime
1. Capital Gain
a)    Capital gains are taxable in the hands of the taxpayer. Any long-term capital gains earned from the equity-oriented mutual funds will be taxed at the rate of 10% if the gains exceed Rs 1 lakh in a year.

b)    Short-term capital gains from the mutual funds, subject to STT, will be taxed at the rate of 15%.

A mutual fund is not liable to deduct TDS on capital gains arising on redemption of units by unit holders.
2. Dividend
Tax on the dividend (DDT) which is paid by the Fund Houses (AMC) on behalf of the investors. DDT has been abolished as per the Budget 2020; from FY 2020-21, dividend income will be taxable in the hands of the receiver/investor.

Author Bio

Qualification: CA in Practice
Company: VDA & Associates
Location: Pune, Maharashtra, IN
Member Since: 29 May 2020 | Total Posts: 3
CA Ajay Naval, Partner at VDA & Associates, Pune View Full Profile

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16 Comments

  1. RAGHUNANDAN NADKARNI says:

    Rs5000 limit is too low. Even ordinary investors under marginal tax bracket will come under tax net. This is too harsh.

  2. kapil agarwal says:

    great article. I also feel that capital gain on property should come down to give a jumpstart to real estate sales and purchase.

  3. Saurabh Zanwar says:

    Very Nicely Explained sir.
    Is TDS required to be deducted on Dividend declared by company also under this section or any other section??

    1. ajay.naval says:

      As per the plain reading of the section, the TDS on Dividend paid on Shares is not covered under 194K. So on this payment, there will not be any TDS under this Section.

  4. Saurabh Zanwar says:

    Very Nicely explained Sir.
    Is TDS required to be deducted on Dividend declared by company also under this section or any other section?

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