What is Section 194K?
Section 194K of the Income Tax Act, 1961, refers to the deduction of Tax Deducted at Source (TDS) on income from mutual funds. This section requires entities paying income from mutual funds to deduct a certain percentage of tax before making the payment to the investor.
Who Does It Protect?
Section 194K protects the interests of the government by ensuring that tax is collected at the source of income earned from mutual funds. It also helps investors by making tax payments easier and more automated, reducing the chance of tax evasion.
Why Was Section 194K Put in Place?
The main purpose of Section 194K is to:
- Ensure timely collection of tax on mutual fund income.
- Make tax compliance easier for investors.
- Prevent tax evasion on earnings from mutual fund investments.
This section makes it mandatory for mutual fund companies or intermediaries to deduct tax on income like dividends or capital gains before paying the net amount to investors.
Applicability of Section 194K
- It applies to any person (including companies and financial institutions) responsible for paying income from mutual funds to investors.
- The tax is deducted at the time of payment of income or credit to the investor’s account, whichever is earlier.
- It covers dividends, capital gains, or other income generated from mutual funds.
Rates of TDS under Section 194K
- As per the latest rules, the TDS rate is 10% on income from mutual funds (mainly dividends).
- If the recipient does not provide their PAN (Permanent Account Number), the TDS rate increases to 20%.
- The rate may vary if there is a Double Taxation Avoidance Agreement (DTAA) applicable to non-resident investors.
Important Amendments to Section 194K
- Initially, TDS was applicable only on dividends from mutual funds.
- Later, the scope was expanded to include capital gains on mutual fund redemptions and other income types.
- Rates and thresholds have been revised several times; currently, the threshold for TDS deduction on mutual fund income is ₹5,000 per financial year.
- In recent amendments, TDS is not applicable if income does not exceed ₹5,000 in a year.
Exemptions under Section 194K
- No TDS if the income from mutual funds is less than the threshold limit of ₹5,000 per year.
- Certain categories like Individual investors who submit Form 15G/15H can claim exemption from TDS.
- Income from mutual funds held by government organizations or specific exempt entities is also exempt.
- Income paid to Non-Resident Indians (NRIs) may have TDS as per DTAA provisions, not necessarily under Section 194K.
How is Section 194K Applied in Practice?
- Mutual fund companies or intermediaries deduct TDS when paying dividends or capital gains.
- The deducted amount is deposited with the Income Tax Department.
- Investors receive a TDS certificate (Form 16A) as proof of tax deducted.
- Investors can claim the deducted tax while filing their income tax returns.
- Failure by the payer to deduct TDS may attract penalties.
Section 194K ensures timely and transparent tax deduction on mutual fund income, making tax compliance easier for investors and the government. The 10% TDS rate applies mainly to dividend income exceeding specified thresholds, with certain exemptions for small investors. This provision streamlines taxation and reduces the chances of double taxation on mutual fund earnings.
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