Accurately filing your income tax returns is crucial, as errors can attract heavy penalties. To ensure accuracy, you need to be aware of the different sections of the Income Tax Act. These sections are either for deductions or the taxation applicable to your annual taxable income.


One of the sections that you need to know is Section 194K. In Section 194K, TDS rules and exceptions for your earnings from mutual fund (MF) dividends are outlined. Knowing sec.194K will enable you to accurately file your return and save on tax, where applicable.


For an in-depth understanding of Section 194K of the Income Tax Act, read on.

What is Section 194K?

In the budget of 2020, the Finance Minister of India introduced Section 194K. This resulted in the elimination of double taxation, which happened due to previous tax laws. Under the previous laws, tax on mutual fund payout was levied when the company distributed to the AMC and when the AMC distributed the same to the unitholders.


However, with 194K of the Income Tax Act, AMCs now only have to deduct 10% TDS, 20% if PAN is not provided, at the time of dividend distribution. It is important to note that under Section 194K, TDS deduction is only applicable if the earnings from MFs exceed ₹5,000.

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

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 recipients of the dividend.  


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?

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

The applicable limit for TDS deduction under this section is ₹5,000. As such, 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

Capital gains are when you make a profit by making a sale at a price higher than your purchase cost. This can either be long-term or short-term capital gains. Regardless, these 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 sec, 194K, a penal interest rate at 1% will be levied from the date when 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.

  • As per Section 271C, a penalty that is equal to the TDS amount may be levied if you fail to pay or deduct the TDS amount applicable to your dividend earnings.


Now that you know what Section 194K is, the TDS applicable to your earnings from mutual funds, and more, be sure to file your returns accordingly. This way, you avoid the penalties associated with non-compliance with the section. 


Moreover, it helps you avoid costly fines 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 FD offers higher interest rates?

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

When is Section 194K levied?

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

What is the applicable rate under Section 194K?

Under Sec 194K of the Income Tax Act, the applicable rate is 10% if you have PAN and 20% if you do not. 

Is deduction under Section 194K avoidable?

Deduction of TDS in 194K is avoidable if your income is below the limit, i.e., ₹5,000 for the given financial year.

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