Understanding Section 194K of the Income Tax Act: Implications for Mutual Fund Investors

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Investing in mutual funds is one of the most popular ways to save and grow money in India. As per data from the Association of Mutual Funds in India (AMFI), the mutual fund industry had a total Asset Under Management (AUM) of over Rs 35 lakh crore as of February 2023. However, investors need to be aware of the various tax implications related to mutual funds. One such tax provision that impacts mutual fund investors is Section 194K of the Income Tax Act, 1961. In this blog, we will explore what Section 194K is and how it affects mutual fund investors.

What is Section 194K of the Income Tax Act?

Section 194K of the Income Tax Act was introduced in the Union Budget 2020 and came into effect from April 1, 2020. The section mandates that any person responsible for paying income to a resident individual, in the form of units of a Mutual Fund (MF) or a Unit Trust of India (UTI), will have to deduct Tax Deducted at Source (TDS) at the rate of 10%, if the income exceeds Rs 5,000 in a financial year. This provision is applicable to both equity-oriented and debt-oriented mutual funds.

Who is liable to deduct TDS under Section 194K?

According to the Income Tax Act, any person responsible for paying income to a resident individual in the form of units of a Mutual Fund or a Unit Trust of India is liable to deduct TDS under Section 194K. This includes fund houses, Asset Management Companies (AMCs), and Registrar and Transfer Agents (RTAs) responsible for distributing mutual funds.

What are the implications of Section 194K for mutual fund investors?

For mutual fund investors, Section 194K means that they need to be aware of the TDS deducted by their fund houses or RTAs. If the investor’s total income, including the income from mutual funds, is below the taxable limit, they can claim a refund of the TDS deducted. However, if the investor’s total income exceeds the taxable limit, they need to include the TDS amount in their income tax return (ITR) and pay additional taxes, if applicable.

It is important to note that TDS is deducted at the time of payment of income, i.e., whenever dividends are declared or redeemed. In case of Systematic Investment Plans (SIPs), TDS is deducted at the time of redemption of units. Thus, investors need to factor in the TDS while calculating their tax liabilities.

However, there are certain exemptions and provisions that investors can take advantage of. For instance, investors can submit Form 15G/15H to their fund houses to avoid TDS if their estimated total income for the financial year is below the taxable limit. Similarly, investors can claim a credit for the TDS deducted in their ITR if they have paid taxes on the same income in a foreign country.

Conclusion

Section 194K of the Income Tax Act aims to widen the tax base and prevent tax evasion by ensuring that TDS is deducted on income from mutual funds. While this may increase the compliance burden on investors, they can take advantage of various provisions and exemptions to reduce their tax liabilities. As always, it is advisable to consult a tax expert for personalized advice on tax planning and investments.

Read more useful content:

Frequently Asked Questions (FAQs)

Q: What is Section 194K of the Income Tax Act?
A: Section 194K of the Income Tax Act is a tax provision that mandates TDS deduction on income from mutual funds or Unit Trust of India (UTI) at the rate of 10% if the income exceeds Rs 5,000 in a financial year.

Q: Who is liable to deduct TDS under Section 194K?
A: According to the Income Tax Act, any person responsible for paying income to a resident individual in the form of units of a Mutual Fund or a Unit Trust of India is liable to deduct TDS under Section 194K. This includes fund houses, Asset Management Companies (AMCs), and Registrar and Transfer Agents (RTAs) responsible for distributing mutual funds.

Q: What is the rate of TDS under Section 194K?
A: The rate of TDS under Section 194K is 10% on income from mutual funds or Unit Trust of India (UTI) if the income exceeds Rs 5,000 in a financial year.

Q: Is TDS under Section 194K applicable to both equity-oriented and debt-oriented mutual funds?
A: Yes, TDS under Section 194K is applicable to both equity-oriented and debt-oriented mutual funds.

Q: How does Section 194K impact mutual fund investors?
A: For mutual fund investors, Section 194K means that they need to be aware of the TDS deducted by their fund houses or RTAs. If the investor’s total income, including the income from mutual funds, is below the taxable limit, they can claim a refund of the TDS deducted. However, if the investor’s total income exceeds the taxable limit, they need to include the TDS amount in their income tax return (ITR) and pay additional taxes, if applicable.

Q: Can investors claim exemptions from TDS under Section 194K?
A: Yes, investors can claim exemptions from TDS under Section 194K by submitting Form 15G/15H to their fund houses if their estimated total income for the financial year is below the taxable limit.

Q: When is TDS deducted under Section 194K for SIPs?
A: For Systematic Investment Plans (SIPs), TDS is deducted at the time of redemption of units.

Q: Can investors claim a credit for the TDS deducted in their ITR?
A: Yes, investors can claim a credit for the TDS deducted in their ITR if they have paid taxes on the same income in a foreign country.

Q: Do investors need to include the TDS amount in their ITR?
A: Yes, investors need to include the TDS amount in their ITR and pay additional taxes, if applicable, if their total income exceeds the taxable limit.

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