Income in respect of units of a Mutual Fund (Section 194K)

The government removed the dividend distribution tax in the 2020 Budget Bill, and as a result, dividend income will now be taxable in the hands of investors and receivers. The honourable finance minister added Section 194K to their speech with effect from April 1, 2020, to provide for the tax deduction on income related to mutual fund units.

Type of Income	Taxability
Capital Gain	Capital gains would be taxed in the hands of the taxpayer under the government's income tax laws. Long-term capital gains from equity-oriented mutual funds that exceed one lakh in a calendar year are taxed at a rate of 10%. Short-term capital gains generated by STT-eligible equity-oriented mutual funds are likely to be taxed at a 15% rate. However, under Section 194K, a mutual fund is not required to deduct TDS on capital gains from redemptions made by the holder.
Dividend	The existing income tax law taxes dividends paid on behalf of the investor by fund houses, or AMCs. According to the 2020 budget, DDT is no longer legal. Dividend income is taxable to the recipient. The new TDS Section of the Finance Act requires mutual funds to withhold TDS on dividends in excess of Rs.5,000 paid to unit holders.

Applicability and rate of tax

Section 194K provides for deduction of tax at source at 10% paying to a resident by any person responsible for any income in respect of:

units of a Mutual fund specified under section 10(23D)
units from Administrator of the specified undertaking
units from the specified company

Time of deduction

The deduction is to be made at the time of credit of such sum to the account of the payee or at the time of payment by any mode, whichever is earlier. Where any income in respect of units of a mutual fund, Administrator of the specified undertaking or the specified company is credited to any account in the books of account of the person liable to pay such income, such crediting is deemed to be credit of such income to the account of the payee and tax has to be deducted at source. The account to which such income is credited may be called “Suspense account” or by any other name.

Non-applicability of section 194K

No tax is required to be deducted if

the amount of such income or the aggregate of the amounts of such income credited or paid or likely to be credited or paid during a financial year does not exceed ₹ 5,000.
the income is of the nature of capital gains.

Meaning of certain terms

Administrator : A person or a body of persons appointed as Administrator u/s 7 of Transfer of Undertaking and Repeal Act, 2002, which provides that the Central Government shall, on and from the appointed day, appoint a person or a body of persons, as the “Administrator of the specified undertaking of the UTI” for the purpose of taking over the administration thereof and the Administrator shall carry on the management of the specified undertaking of the Trust for and on behalf of the Central Government.

Specified company : A company to be formed and registered under the Companies Act, 1956 and whose entire capital is subscribed by such financial institutions or banks as may be specified by the Central Government, by notification in the Official Gazette, for the purpose of transfer and vesting of the undertaking.

Specified undertaking : It includes all business, assets, liabilities and properties of the Trust representing and relatable to the schemes and Development Reserve Fund specified in the Schedule I of Transfer of Undertaking and Repeal Act, 2002.

TDS return and certificates

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

Consequences for not deducting or delaying TDS Failure to deduct the TDS or to remit tax deducted in the government's account within the stipulated time limit would attract interest and penalties 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 at the rate of 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) A penalty equal to the amount of tax not deducted or paid could be imposed under Section 271C.

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CHETNAA GOYAL

FCA, B.COM, More than 10 years of Experience in Direct Tax