Section 194K of the Income Tax Act, 1961, was introduced by the Finance Act, 2020. This section mandates a tax deduction at source (TDS) on income earned by mutual fund units holders who receive payouts from their mutual fund investments. In this blog, we will explore the details of Section 194K of the Income Tax Act, including its applicability, rates, and compliance requirements.
Applicability of Section 194K
Section 194K applies to payouts made to resident individuals, Hindu Undivided Families (HUFs), and Association of Persons (AoPs) who hold units in mutual funds. This includes payouts made by mutual fund schemes, including equity-oriented funds, debt funds, hybrid funds, and other mutual fund schemes.
Rates of TDS under Section 194K
The TDS rate under Section 194K is 10% on the gross amount of payout made to the unit holders. The TDS is required to be deducted at the time of payment of the income or credit of the income to the account of the unit holder, whichever is earlier. If the unit holder has not provided their Permanent Account Number (PAN) or Aadhaar number to the mutual fund, the TDS rate will be 20%.
Exemptions under Section 194K
There are certain exemptions available under Section 194K. The TDS provisions do not apply if the payout made to the unit holder is less than Rs. 5,000 in a financial year. Additionally, TDS is not required to be deducted if the unit holder is a non-resident or a foreign company.
Compliance Requirements under Section 194K
The mutual fund is responsible for deducting TDS under Section 194K and depositing it with the government within the prescribed due date. The mutual fund is also required to issue a TDS certificate to the unit holder in Form 16A. This certificate must be issued within 15 days of the due date for filing the TDS return. The unit holder can claim the TDS credit while filing their income tax return.
Impact of Section 194K on Mutual Fund Investors
Section 194K has a significant impact on mutual fund investors as it increases the compliance requirements for them. Earlier, mutual fund investors did not have to worry about TDS deductions on their investments. However, with the introduction of this section, mutual fund investors need to be aware of the TDS deductions made by the mutual fund and claim the TDS credit while filing their income tax returns.
Moreover, the TDS rate of 10% on payouts is higher than the rate of 7.5% applicable to interest income under Section 194A. This can result in a higher tax outgo for mutual fund investors, especially those in higher tax brackets.
Exemptions under Section 194K, such as the threshold limit of Rs. 5,000, can provide relief to small investors. However, investors with larger mutual fund investments may face a higher TDS burden.
Impact of Section 194K on Mutual Fund Industry
Section 194K also impacts the mutual fund industry, as it increases the compliance requirements for mutual fund houses. Mutual fund houses need to deduct TDS on payouts made to investors and deposit it with the government within the prescribed due date. They also need to issue TDS certificates to investors within the stipulated time frame.
This increases the administrative burden on mutual fund houses, which may result in additional costs. Moreover, mutual fund houses need to ensure compliance with the TDS provisions to avoid penalties and legal repercussions.
Conclusion
Section 194K of the Income Tax Act, 1961, is a significant provision that impacts mutual fund investors and the mutual fund industry. Mutual fund investors need to be aware of the TDS provisions under this section and ensure compliance with the requirements. Mutual fund houses need to ensure compliance with the TDS provisions and manage the administrative burden imposed by this section. Overall, Section 194K reinforces the importance of tax compliance and increases the transparency of the mutual fund industry.
Read more useful content:
- section 234e of income tax act
- section 286 of income tax act
- section 90a of income tax act
- section 40a(7) of income tax act
- section 226(3) of income tax act
- section 24 of income tax act
Frequently Asked Questions (FAQs)
Who is required to deduct TDS under Section 194K of the Income Tax Act?
Ans: Mutual fund houses are required to deduct TDS under Section 194K on payouts made to resident individuals, HUFs, and AoPs who hold units in mutual funds.
What is the TDS rate under Section 194K?
Ans: The TDS rate under Section 194K is 10% on the gross amount of payout made to the unit holder.
Is there any exemption available under Section 194K?
Ans: Yes, exemptions are available under Section 194K. The TDS provisions do not apply if the payout made to the unit holder is less than Rs. 5,000 in a financial year. Additionally, TDS is not required to be deducted if the unit holder is a non-resident or a foreign company.
When is TDS required to be deducted under Section 194K?
Ans: TDS is required to be deducted at the time of payment of the income or credit of the income to the account of the unit holder, whichever is earlier.
What is the penalty for non-compliance with the TDS provisions under Section 194K?
Ans: Non-compliance with the TDS provisions under Section 194K can result in a penalty equal to the amount of TDS that should have been deducted.
How can a unit holder claim the TDS credit under Section 194K?
Ans: The unit holder can claim the TDS credit while filing their income tax return.
Is TDS applicable to all types of mutual fund schemes under Section 194K?
Ans: Yes, TDS is applicable to all types of mutual fund schemes, including equity-oriented funds, debt funds, hybrid funds, and other mutual fund schemes.
What is the TDS certificate required under Section 194K?
Ans: The mutual fund is required to issue a TDS certificate to the unit holder in Form 16A. This certificate must be issued within 15 days of the due date for filing the TDS return.
What is the TDS rate if the unit holder has not provided their PAN or Aadhaar number to the mutual fund?
Ans: If the unit holder has not provided their PAN or Aadhaar number to the mutual fund, the TDS rate will be 20%.
Does Section 194K apply to non-resident mutual fund investors?
Ans: No, Section 194K does not apply to non-resident mutual fund investors or foreign companies.
