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Section 194K was introduced in the Finance Act by Finance Minister Nirmala Sitharaman in the Budget 2020. The implementation of TDS (Tax Deducted at Source) Section 194K has brought a significant shift in the landscape of taxation concerning dividends in the context of mutual funds. Prior to the introduction of this section, the treatment of dividends under the tax framework posed distinctive challenges for companies distributing dividends and the beneficiaries receiving them. The complex interplay between dividend income and the existing tax structure necessitated a review of policies to ensure a simplified and transparent taxation process. With the insertion of Section 194K, a transformative approach to TDS on mutual fund dividends has become instrumental in reshaping the dynamics of dividend taxation, enabling greater clarity and compliance for all stakeholders involved.
The recent inclusion of Section 194K marks a significant shift in the tax framework, as it revokes the previous exemption related to income from mutual fund units by eliminating Section 10(35). According to the newly introduced Section 194K, any individual accountable for remunerating a resident concerning:
The deductor must deduct TDS (Tax Deducted at Source) of 10% when crediting such income to the payee's account if it exceeds ₹5,000. Alternatively, the deduction should be made at the time of payment, whichever comes first. This step underscores a definitive move by the authorities to streamline and regulate the tax implications associated with these financial transactions.
However, the recent addition of Section 194K in the Finance Act of 2021 does not mandate mutual funds to deduct TDS on capital gains arising from the redemption of units by unitholders. This provision marks a deliberate decision by the authorities to maintain a streamlined approach to the taxation of capital gains from mutual funds, ensuring clarity and consistency in the tax framework.
Previously, the income tax laws entailed a double taxation of dividends. Initially, companies were taxed when paying Asset Management Companies (AMCs) dividends. Subsequently, a second tax was levied when the AMCs distributed profits to the unitholders.
Investors could reinvest their profits into the fund or receive dividend income. Opting for the latter would lead the AMC to once again pay the Dividend Distribution Tax (DDT) on the dividend distribution.
However, the Budget of 2020 brought a significant change, abolishing the DDT. Currently, AMCs are only obligated to deduct TDS at 10% on the dividend distribution, provided the dividend payment per recipient exceeds Rs 5,000 within a fiscal year.
Note: TDS should be deducted at 20% if the investor does not provide PAN. Additionally, for Non-Resident Indian (NRI) investors, TDS should be deducted as per the regulations specified in Section 195. This alteration signifies a concerted effort to streamline and rationalize the taxation structure pertaining to dividends in the domain of mutual funds.
The applicable TDS rate under Section 194K for Mutual Funds is 10%, provided the dividend payment exceeds Rs 5,000 within a financial year.
There are certain scenarios where TDS might be deducted at a different rate or not deducted at all, such as cases involving Non-Resident Indian (NRI) investors and specific provisions outlined in Section 195 of the Income Tax Act.
Yes, investors can claim TDS deducted under Section 194K as a tax credit while filing their income tax returns, thereby reducing their overall tax liability.
