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On This Page: What is Section 194K of the Income Tax Act? | Why was Section 194K of the Income Tax Act Introduced? | Who is Eligible to Deduct TDS as per Section 194K? | When Do You Need to Deduct TDS as per Section 194K? | What are the Exceptions to Section 194K of the Income Tax Act? | What was the Income Tax Regulation Before Section 194K? | What are the Consequences for Delay or Non-Deduction of TDS?
Finance Minister Nirmala Sitharaman proposed section 194K during Budget 2020 under the Finance Bill. This new section allows a tax deduction on the amount paid for the mutual fund units without prescribing any specified limit.
Section 194K eradicated S. 10(35) of the Income Tax Act, 1961. According to S. 194K of the Income Tax Act, any person or individual responsible for paying an income to a resident in relation to:
S. 10(23D)-Units of Mutual Fund
Or any particular company’s units
While crediting such income to the payee’s account (exceeding an amount of Rs. 5,000 or at the time of making any payment or whichever is earlier), TDS shall be charged @ 10%. Before the introduction of this section, the dividends were levied and taxed twice a year.
Dividend Distribution Tax or DDT was abolished from 1st April 2020 and now the income from dividend will be taxable in the hands of the receiver. Earlier, S. 10(35) exempted the dividend received on the equity shares and mutual funds. Now, the government taxes this income at slab rates.
If you are paying dividends on mutual funds, you should deduct TDS per section 194K of the Income Tax Act. You must calculate this deduction at the rate of 10% on the number of dividends, provided your total and complete dividend in a financial year exceeds the amount of Rs.5,000. S. 194K has been applicable from 1st April 2020, i.e. FY 2020-21 onwards.
Under the previous income tax laws, income from dividends were taxed twice. Before the imposition of tax, the company used to pay dividends to an asset management company or AMC. And the AMC used to distribute the profits to the unitholders.
Hence, an investor had an option either to invest back or earn dividend income. If you choose to earn dividend income, then AMC again has to pay Dividend Distribution Tax at the time of distribution of the fund.
Whereas, after the introduction of the new tax regime by the Central Government, DDT got abolished and now only AMC needs to deduct the TDS at the rate of 10% at the time of distribution of dividends. But the dividend per recipient should exceed Rs. 5,000 in a Financial Year.
Any individual who has the responsibility of paying a resident any income concerning the following can deduct TDS, while crediting such income to the payee’s account or making the payment by any mode.
Mutual Fund units
Administrator units from a specified undertaking
Specified or any particular company’s units
TDS must be deducted under the following circumstances:
While crediting the income to the payee’s account or making payment by any mode, whichever is earlier.
Whenever a payer credits such income to any other account, such as a suspense account, it is considered as deemed income by the Income Tax Department, and henceTDS must be deducted here.
The Income Tax Department must not deduct TDS per Section 194K of the Income Tax Act under the following circumstances:
If the income from dividend is up to or less than Rs. 5,000 in any financial year after 2020.
The capital gain income must also be exempted from the scope of Section 194K of the income tax act.
As per the previous regime, the responsibility of reporting of dividend income and capital gains was on individual investors.
Dividend income received from mutual funds was exempted as per Section 10(35).
Whereas, there was no prescribed provision concerning the deduction of TDS on any income that is earned from mutual funds.
Only NRIs had to pay TDS.
Dividend Distribution Tax was charged to the company that distributed dividends, whereas taxpayers used to go tax-free.
In case of any failure to deduct TDS or remittance of tax deducted in Government account within any stipulated time limit, it attracts penalty and interest as follows:
Disallowance of any expenditure as prescribed under Section 40(a)(i).
Interest at the rate of 1% for every month on the amount of the tax which was to be deductible on any particular date.
Interest at the rate of 1% for every month on the amount of the tax to be actually paid.
Penalty equal to tax not deducted or paid can be imposed as per S. 271C.
The new provisions under S. 194K of the Income Tax Act have shifted the burden of payment of tax to the dividend income on investors. Before the introduction of this section, the distribution company had to pay the tax, but now the onus has shifted to the recipient of the dividend income, thus eliminating double taxation. Read other related articles about income tax to know more about Sections in the Income Tax Act.