Section 194NF of the Income Tax Act, 1961 was introduced by the Finance Act, 2021, and came into effect from April 1, 2021. This section deals with the taxation of income distributed by a business trust or investment fund to its unit holders.
What is a Business Trust or Investment Fund?
Before we delve deeper into Section 194NF, it is important to understand what a business trust or investment fund is. A business trust or investment fund is a type of investment vehicle that pools money from various investors and invests it in a portfolio of assets. The income generated from these assets is then distributed among the investors in proportion to their investment in the trust or fund.
What is Section 194NF?
Section 194NF applies to any income distributed by a business trust or investment fund to its unit holders. It states that any person responsible for making the payment of such income shall deduct tax at the rate of 10% at the time of making the payment.
The term “person responsible for making the payment” refers to the trustee or the manager of the business trust or investment fund, or any other person authorized by the trustee or manager to make the payment.
The income referred to in Section 194NF includes any income distributed by the business trust or investment fund, whether it is in the form of interest, dividend, capital gains, or any other income.
Exceptions to Section 194NF
However, there are certain exceptions to Section 194NF. The section does not apply to the following:
- Income is distributed by a business trust or investment fund to a resident individual or Hindu Undivided Family (HUF) if the total amount of such income does not exceed Rs. 5,000 in a financial year.
- Income distributed by a business trust or investment fund to any person, other than an individual or HUF, if the total amount of such income does not exceed Rs. 1,000 in a financial year.
- Income is distributed by a business trust or investment fund to any person if the income is like a capital gain arising from the transfer of a long-term capital asset.
- Income is distributed by a business trust or investment fund to any person if the income is like interest received or receivable from a Special Economic Zone (SEZ) developer or SEZ unit.
Final Conclusion
Section 194NF is an important provision in the Income Tax Act that aims to ensure that income distributed by a business trust or investment fund is properly taxed. Trustees, managers, and authorized persons should be aware of this provision and comply with its requirements to avoid any penalties or legal issues.
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Here are some frequently asked questions related to Section 194NF of the Income Tax Act:
- What is Section 194NF of the Income Tax Act, of 1961?
Section 194NF is a provision in the Income Tax Act, of 1961 that deals with the taxation of income distributed by a business trust or investment fund to its unit holders. The section requires the person responsible for making the payment to the unit holder to deduct tax at the rate of 10% on the income distributed.
- Who is responsible for deducting tax under Section 194NF?
The trustee or manager of the business trust or investment fund, or any other authorized person who is responsible for making the payment to the unit holder is responsible for deducting tax under Section 194NF.
- What is the rate of tax deduction under Section 194NF?
The tax is deducted at the rate of 10% on the income distributed to the unit holder under Section 194NF.
- What types of income are covered under Section 194NF?
All types of income distributed by a business trust or investment fund, including interest, dividend, capital gains, or any other income, are covered under Section 194NF.
- Are there any exceptions to Section 194NF?
Yes, there are exceptions to Section 194NF. The section does not apply to income distributed to a resident individual or Hindu Undivided Family (HUF) if the total amount of such income does not exceed Rs. 5,000 in a financial year. Similarly, the section does not apply to income distributed to any person, other than an individual or HUF, if the total amount of such income does not exceed Rs. 1,000 in a financial year.
- What happens if the person responsible for making the payment fails to deduct tax under Section 194NF?
If the person responsible for making the payment to the unit holder fails to deduct tax under Section 194NF or deducts tax at a lower rate than prescribed, they may be subject to penalties and interest under the Income Tax Act, 1961.
- Does Section 194NF apply to income that is like capital gains or interest received from a Special Economic Zone (SEZ) developer or SEZ unit?
No, Section 194NF does not apply to income that is like capital gains arising from the transfer of a long-term capital asset. It also does not apply to income that is like interest received or receivable from a Special Economic Zone (SEZ) developer or SEZ unit.
- When did Section 194NF come into effect?
Section 194NF came into effect on April 1, 2021, after it was introduced by the Finance Act, 2021.
