The introduction of Section 194K of the Income Tax Act shifted the onus of reporting dividends and deducting the applicable tax from companies to the dividend recipients. Section 194K offers a deduction of 10% on the dividend income generated from mutual funds. Remember, a deduction of 20% is applicable if PAN is not provided, at the time of dividend distribution. Also, the TDS applies if your mutual fund earnings exceed an amount of ₹5,000.

Who Deducts TDS Under Section 194K of the Income Tax?

In simple terms, the AMC or fund houses now have to deduct TDS while transferring the income to the payee’s account. Income from the following units is subject to deduction under the Section 194K of the Income Tax:

  • Mutual Fund units as per Section 10(23D)

  • Units from a specified company

  • Units from the administrator of specified undertakings

When is Section 194K Applicable?

Only dividend income is subject to TDS deduction. Additionally, Section 194K TDS deduction is applicable only when the dividend amount is above ₹5,000 in a fiscal year.

 

The rate of TDS deduction u/s 194K is 10%, provided that you can furnish a valid PAN card. If you do not have a valid PAN Card, the TDS rate increases to 20%.



Mutual funds result in two types of income – dividends and capital gains. A dividend is when the fund houses offer payouts, generally at each quarter of the financial year, during your investment tenor. 

 

Capital gains, on the other hand, are when you sell your investment at a price higher than your purchase price. The tax treatment for both these incomes from mutual funds is different. 

 

Understanding which income is liable for deduction of TDS u/s 194K allows you to stay aware of your tax liability and pay it without any delay. An essential point to remember is that capital gains are not liable for any deductions.

When is Section 194K Applicable?

Mutual funds result in two types of income – dividends and capital gains. A dividend is when the fund houses offer payouts, generally at each quarter of the financial year, during your investment tenure. 

 

Capital gains, on the other hand, are when you sell your investment at a price higher than your purchase price. The tax treatment for both these incomes from mutual funds are different. 

 

Understanding which income is liable for deduction under the 194K section of the Income Tax Act allows you to stay aware of your tax liability and pay it without any delay. An essential point to remember in this regard is that capital gains are not liable for any deductions.

 

Only the income you earn from dividends is subject to TDS deduction under Section 194K. TDS deduction, however, is levied by AMC/ fund houses only when the dividend amount is above ₹5,000 in a fiscal year.

 

The rate of TDS deduction under Section 194K is 10%, provided that you can furnish a valid PAN card. If you do not have a valid PAN Card, the TDS deducted by the fund house or the AMC increases to 20%.

Exceptions Under Section 194K

There are two exceptions for TDS deduction under Section 194K. These exceptions are:

  • Dividend Income Under the Limit

If your dividend income is under ₹5,000, it is not subject to any TDS deduction by the fund house or the AMC.

  • Income from Capital Gains

Any long-term or short-term capital gains do not attract any TDS deduction under this section.

Penalties on Non-compliance of Section 194K

When you do not comply with a section of the Income Tax Act, the government can impose penalties. As such, it becomes crucial to ensure that you file returns in order with the different sections of the Income Tax Act.

 

With regard to the Section 194K of the Income Tax, non-compliance can expose you to the following penalties:

  • Disallowance of expenses under Section 40(a) of the Income Tax Act

  • If you fail to deduct TDS as per Section 194K, a penal interest rate of 1% will be levied from the date when the deduction was applicable till the date you actually deduct it

  • If you fail to pay the TDS deduction under Section 194K, an interest rate of 1.5% will be applicable from when you were supposed to pay till the day you do

  • A penalty that is equal to the TDS amount may be levied as per Section 271C

 

Now that you know what Section 194K is, the TDS applicable to your earnings from mutual funds, be sure to file your returns accordingly. This helps you avoid penalties that can restrict you from growing your wealth steadily. In some cases, the consequences can be far worse than a penalty and can seriously affect your financial standing. 

FAQs on Section 194K of the Income Tax Act

Which type of income is subject to TDS deduction?

The income you earn from mutual funds as dividends is applicable for TDS deduction under Section 194K.

When is Section 194K levied?

For the purpose of TDS, Section 194K is applicable when your income from dividends exceeds ₹5,000 in a financial year.

What is the applicable rate under Section 194K?

As per Section 194K, the applicable rate is 10% if you have a PAN and 20% if you do not.

Is deduction under Section 194K avoidable?

Yes, if your income from dividends is below the limit, i.e., ₹5,000 for the given financial year, no TDS shall be deducted.

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