TDS on Mutual Fund Dividend Income – Section 194K
A New TDS section 194K was introduced through Finance Bill 2020-2021 to levy TDS on Mutual fund dividends. TDS@10% shall be deducted from dividend income paid by the company or mutual fund to its share or Unit holder.
This Section will take effect from 1st April, 2020.
Main Provisions of the Section 194K
As per the provision of Section 194K, any person responsible for paying to a resident any income arising from–
(a) Mutual Fund Units specified under clause (23D) of section 10; or
(b) Units from the Administrator of the specified undertaking; or
(c) Units of the specified company,
Shall, at the time of credit of such income to the account of the payee or at the time of payment (by any mode), whichever is earlier, deduct TDS thereon at the rate of ten percent (10%).
* TDS@10% is required to be deducted from the dividend part of income by mutual funds
CBDT Clarification on Section 194K
A Clarification on section 194K issued by the Central Board of Direct Taxes on 4th Feb 2020.
CBDT has issued a clarification that the requirement of deducting TDS U/s 194K@10% will only apply to dividend payments by mutual funds.
No TDS shall be required to be deducted by the mutual fund on income which is in the nature of capital gains. TDS is to be deducted on the dividend part only.
When TDS is not required to be deducted U/s 194K?
TDS under Section 194K shall not be deducted, where the amount of such income credited or paid or likely to be credited or paid during the financial year by the person responsible for making the payment to the account of, or to, the payee does not exceed five thousand rupees (Rs.5000).
Thus, Rs. 5000 shall be the annual threshold limit for the applicability of Section 194K.
Therefore, No TDS shall be deducted where the dividend/income paid by the mutual fund or company to its share or unit holder during the financial does not exceed Rs.5000.
Explanation – for the purpose of section 194K
(a) “Administrator” means the Administrator as referred to in clause (a) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;
(b) “specified company” means a company as referred to in clause (h)of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;
(c) “specified undertaking” shall have the meaning assigned to it in clause (i) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002.
Summary of Section 194K
- TDS shall be deducted on income (dividend only) paid by the company or mutual fund to its share or unit holder
- The rate of TDS shall be 10% (Ten percent)
- Tax is to be deducted at the time of credit or payment of the amount of dividend or income* to the account of the payee (share /unit holder) by any mode, whichever is earlier.
- No deduction of TDS where dividend/income paid or to be paid during the financial year does not exceed five thousand rupees
- TDS@10% is subject to an annual threshold limit of income or dividend
- Tax of 10% limited to dividends on Mutual fund