Section 194K of the Income Tax Act, 1961, relates to the TDS on income from mutual funds and specified units. This section primarily deals with the taxation of income earned by investors in the form of dividends and capital gains from mutual funds. If you’re an investor or an entity managing mutual funds, it’s important to understand the TDS provisions under this section.
What is Section 194K?
Section 194K requires the mutual fund or the specified entity to deduct tax at source when they make payments to investors. The payments in question are:
- Dividends: Payments made to the investors from the mutual fund’s earnings.
- Capital Gains: Earnings from the sale of mutual fund units.
The rate of TDS under this section is 10% if the total amount exceeds ₹5,000 in a financial year. However, if the investor does not provide their PAN details, the TDS rate increases to 20%.
Who is Liable to Deduct TDS under Section 194K?
The mutual fund house or the person making the payment (like a distributor or an asset management company) is responsible for deducting the TDS. This is applicable to both domestic and foreign investors. The TDS is deducted at the time of the payment of dividends or at the time of redemption of mutual fund units.
When and How to File the TDS Return?
Once TDS is deducted under Section 194K, the deductor must file a TDS return in Form 26Q. You need to file this form quarterly, and also it provides details of the tax deducted and deposited with the government.
Here are the key steps involved in filing the TDS return:
- Deduct TDS: The mutual fund company or the person responsible for the payment deducts the applicable tax (10%) at the time of payment.
- Deposit the TDS: After deduction, the tax must be deposited with the government using the prescribed challan.
- File TDS Return: The deductor files Form 26Q to report the TDS details, which includes PAN details of the deductee and the amount of TDS deducted.
Example:
Let’s consider an example to understand the process better:
Imagine you receive a dividend of ₹6,000 from a mutual fund. As the dividend exceeds ₹5,000, 10% TDS will be deducted.
- Dividend Paid: ₹6,000
- TDS Deducted: 10% of ₹6,000 = ₹600
- Amount Received: ₹6,000 – ₹600 = ₹5,400
Thus you will receive ₹5,400 and ₹600 will be deposited with the government as TDS. You will also get a TDS certificate reflecting the deduction of. You can use this while filing your income tax return.
Conclusion:
Section 194K ensures that TDS is deducted at the source for mutual fund-related income, thus helping in seamless tax collection. It is essential for both deductors and deductees to comply with the rules by filing returns correctly and on time. Understanding these aspects helps investors stay compliant and avoid surprises during tax filing.
– Ketaki Dandekar (Team Arthology)
Read more about Section 194K here – https://cleartax.in/s/194k