Section 194K—Tax Deduction on Income from Mutual Fund Units

During Budget 2020, Nirmala Sitharaman recommended adding Section 194K to the Finance Act. This clause allows any resident individual to deduct the amount paid on mutual fund units, up to a certain limit. Let's have a look at Section 194K in terms of:

Income from mutual fund units comes in a variety of forms.

A person can generate two forms of income by investing in mutual fund units in general. They are as follows:

Sl. No.	Income Type	Chargeability to tax
1	Capital Gains	Current Regime: Capital gains are taxable in the hands of the taxpayer. Any long-term capital gains earned from the equity-oriented mutual funds will be taxed at the rate of 10% if the gains exceed Rs 1 lakh in a year. Similarly, any short-term capital gains earned from the mutual funds, subject to STT, will be taxed at the rate of 15%. New Regime: A mutual fund is not liable to deduct TDS on capital gains arising on redemption of units by unitholders.
2	Dividend	Current Regime: Tax on the dividend (DDT) which is paid by the Fund Houses (Asset Management Company) on behalf of the investors. New Regime: DDT has been abolished as per the Budget 2020; from FY 2020-21, dividend income will be taxable in the hands of the receiver/investor.

Scope of sec 194k
The Finance Bill 2020 included a new provision, Section 194K, that will take effect on April 1, 2020. By repealing Section 10, this new section eliminates the exemption for income from mutual fund units (35). Any individual who is accountable for paying an income to a resident under Section 194K:

• Units of a Mutual Fund as per Section 10(23D)
• Units from the Administrator
• Units from a specified company at the time of credit of such income to the payee’s account exceeding Rs 5000 or at the time of making payment, whichever is earlier, shall deduct TDS @10%

Purpose of section 194K
Dividends were taxed twice under the present income tax regulations. When a firm paid a dividend to an asset management organisation, a tax was levied at first (AMC). The second constraint was the timing of the AMC's profit distribution to unitholders.

An investor can either invest back into the fund or earn dividend income. If he chooses to earn dividend income then the AMC will again be required to pay DDT on the distribution of dividend. When it comes to the new tax regime, DDT is abolished and only AMC is required to deduct TDS @ 10% on the distribution of dividend, provided that the dividend paid per recipient exceeds Rs 5,000 in an FY.

Exceptions to the section, if any
TDS under Section 194K is not required to be deducted in the following cases:
• Tax @ 10% is not required to be deducted at source if the dividend income is up to Rs 5,000 in a financial year.
• Capital gain income is also exempted from the applicability of Section 194K.

Income tax provision before Section 194K
Under the current regime, the onus of reporting dividend income and capital gains was on individual investors. Dividend income from mutual funds was exempt under Section 10(35). On the other hand, there was no provision regarding deduction of TDS on any income earned from Mutual funds. Only NRIs were subject to TDS. DDT was charged on the company distributing dividends, but the same was tax-free in the hands of the taxpayer.