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Section 194K – Tax Deduction On Income From Mutual Fund Units


Section 194K – Tax Deduction On Income From Mutual Fund Units

A mutual fund is a type of financial instrument that combines money from investors to buy stocks, bonds, gold, and other assets. Companies that are eligible to establish mutual funds establish Asset Management Companies or i.e., AMCs or Fund Houses, which collect investor cash, promote mutual funds, handle investments, and facilitate investor transactions.

Mutual funds are managed by reputable financial experts that specialise in investment analysis and portfolio management, known as fund managers. According to the investment goal of the mutual fund, the money raised from investors is invested by fund managers in a variety of financial assets, including stocks, bonds, and other assets.

The fund managers are responsible for a variety of tasks, including deciding where and when to invest.

The expense ratio is the cost to the investor that the AMC levies for managing the fund. It is not a set charge and differs from mutual fund to mutual fund. The maximum expense ratio that can be imposed in relation to the fund’s total assets has been determined by SEBI. By developing a structure that benefits all stakeholders, including investors and mutual fund sponsors, India’s capital markets regulator SEBI (Securities and Exchange Board of India) has promoted the mutual fund sector. Periodically, regulations are established to enhance performance, draw in investors, and spur economic growth.

What is TDS?

Tax deducted at source is referred to as TDS. According to the Income Tax Act, every business or individual making a payment must deduct tax at the source if the payment is greater than a particular threshold amount.

TDS must be subtracted at the rates that the tax agency specifies. The business or individual making the payment after subtracting TDS is referred to as the deductor, while the business or individual receiving the money is referred to as the deducted.

Before making a payment, the deductor is required to deduct TDS and deposit it with the government. Whether paying with cash, a check, or a credit card, TDS is still taken out and connected to the deductor’s PAN.

TDS on Income from Mutual Funds Units

Previously, under section 10(35), the income from mutual fund unit or units were excluded. The government has, however, included a TDS deduction on Income from Mutual Fund Units in the Finance Bill, 2020.

Now, if the resident investor’s income from the dividend reaches or crosses RS. 5,000 in a FY i.e., financial year, section 194K of the Income Tax Act, 1961 applies. And as per this section it is required that the person paying dividends on mutual funds to deduct TDS @ 10%.

Since Section 194K becomes operative on April 1, 2020, it will be applied beginning with FY 2020–21, for all such tax payers.

To deduct TDS on dividend income from mutual funds, Section 194K is required

Dividend income was subject to double taxation prior to the introduction of section 194K. Initially, the dividend was paid when the corporations paid the mutual fund companies or which is also referred to as the asset management companies, and afterwards, when the mutual fund companies delivered the dividend to investors. At that point, they were required to pay tax called Dividend Distribution Tax i.e., DDT.

The DDT is no longer in effect and the thanks for this goes to the addition of section 194K, and only mutual fund firms are now required to withhold TDS from investors’ dividend payments.

Definition and Scope of Section 194K

Any person obligated to pay an income to the Indian resident in accordance with Section 194K pertaining to the:

  • units as defined by Section 10 of a mutual fund (23D)
  • Units which are from the Administrator, and
  • Units from a specific entity must comply with section 194K’s TDS deduction requirement.

Thus, we can now state that

“Deductor” refers to the mutual fund that distributes dividends to investors. They will be required to withhold and pay TDS to the government on any dividends. Additionally, resident investors who get dividend income from these mutual funds are considered “Deductee” and receive the money after the deduction of tax deducted at source or the TDS in accordance with Section 194K.

Note that Section 195 already covers NRI shareholders and investors.

Threshold amount for section 194K TDS deductions

The deductor must deduct TDS if the amount of the payment exceeds Rs 5,000. However, under the following circumstances, the TDS should not be subtracted:

TDS deduction exclusions under section 194K

If the dividend income is up to or more thanRs. 5,000 in a fiscal year, the revenue is derived from the capital gain.

Section 194K TDS rate

Regarding residents of the country

TDS rate is required to be 10% under section 194K. TDS will be withheld at a rate of 20% if the payee fails to supply the PAN information.

Regarding non-residents of the country

Section 195 requires the deduction of TDS.

When TDS is deducted under section 194K

TDS must be taken out at the earliest of

  • If such money is credited to the payee’s account, or
  • When submitting a payment to the tax payer or person.

Section 194K TDS certificate and TDS return

The deductor must submit the TDS return in Form 26Q –on a quarterly basis through the TRACES site after depositing TDS with the government of the country India.

Form 16A which is the tax credit certificatemust be downloaded by the deductor from the TRACES site and sent to the deductee. The deductee can submit Form 16A to claim the TDS credit when submitting their income tax return and get the following benefits:

  • Adjust the TDS credit with total income tax liability,
  • Get refund if no income tax liability or the income tax liability is below the TDS credit available.

Mutual funds are one of the safest and soundest investment opportunity which is existing in the Indian market today. And we can see that many of the young population who are working class are investing in these.

The advantages of mutual fund investing

Mutual fund investment may be quite advantageous, especially if you’re seeking for a straightforward yet diversified method of investing. Mutual funds are easy to use and expertly managed.A mutual fund is a type of financial vehicle that collects money from many participants and then invests it on their behalf in a variety of assets and investment alternatives. You get a particular number of units in a mutual fund when you make an investment in it. The NAV which is the short for net asset value of the mutual fund is used to divide the income the fund earns among people who are the investors.

  • Professional Leadership

Professional fund managers that specialise in managing mutual funds make decisions about where and when to invest the pooled assets. By continuously monitoring market trends and doing in-depth research, investments are made.

  • Liquidity

The ability of an asset to be turned into liquid cash is referred to as liquidity. Suppose for yourself being in a situation where you are in need money on an urgent basis but don’t have enough in your bank. Property cannot be sold or on that a loan cannot be obtained immediately. However, you have the option to easily withdraw your money invested in the mutual funds. When you want quick access to cash, mutual fund investments are well known for being highly liquid assets. Given that certain mutual funds may have a lock-in period, you should inquire with your fund manager if your mutual fund may be paid out immediately.

  • Diversification

Your fund management will invest your money in a variety of assets, including equity, stocks, debt funds, and other money market instruments, when you invest in mutual funds. There isn’t much of a possibility that any instrument won’t develop to its full capacity, according to logic. Additionally, if one instrument doesn’t perform as well as the other, it’s feasible that they may balance each other out and reduce your risks, making your investment safer.

  • Smaller, More Responsible Investments

You may start investing in mutual funds with as little as Rs. 500. A Systematic Investment Plan (SIP) might assist you in developing the habit of investing frequently if you lack the necessary discipline. This means you can guarantee that you are building a practise for investing sometimes and that you are not continuously anxious about investing significant quantities of money.

  • Availability and simplicity

Mutual fund investing is considerably easier than stock market investing, which may be a complex process. You only need to walk into a bank or other financial institution to promptly have a mutual fund account set up for you. A mutual fund account may be opened from the convenience of your home. Using online accounts or even mobile applications, you may begin investing when your Know Your Customer (KYC) paperwork have been validated.

Numerous Plans for mutual funds are created to meet the many different needs of people. There are consequently several Mutual Fund plans. The mutual fund schemes are divided into three groups looking back. They consist of hybrid funds, debt funds, and equity funds. The ones that invest their capital in equities and equity-related products are equity funds. The schemes known as debt funds, on the other hand, invest in fixed income securities such as treasury bills, government bonds, commercial papers, and more. Balanced funds, commonly referred to as hybrid funds, invest in both equity and debt products. Other categories exist in addition to these schemes, including ELSS, sector funds, gold funds, and fund of funds.



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