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Section 194K - TDS on Income from Mutual Fund Units and furnishing Form 15G/Form 15H

section-194k-tds-on-income-from-mutual-fund-units-and-furnishing-form-15g-form-15h

Finance Act, 2020 has introduced a new section in the Income Tax Act, 1961 to provide for TDS on Income from Mutual Fund Units. This article answers why this section is introduced, what is the applicable rate of TDS for income from units of a mutual fund and which nature of income from units is exigible to TDS. Further, how can TDS on Income from Mutual Fund Units be saved and Can Form 15G or Form 15H be furnished in the absence of any legislative amendment by the Finance Act, 2020 to this effect.


    Introduction


    Section 194K was in statute till 01-06-2016 when Finance Act, 2016 has omitted the section from the Income Tax Act, 1961. Even though the provision was omitted from 2016 but the section was made inoperative way back in 2013 from 01-04-2003.

    At that time, the section was related to TDS on income from Mutual Fund Units. With this amendment by Finance Act, 2020, section 194K is once again revived.

    Why Section 194K prescribing TDS on income from Mutual Fund units introduced

    Prior to the enactment of Finance Act, 2020, Mutual Funds were required to pay additional income tax on income distributed (popularly known as Dividend Distribution Tax or DDT) to its unitholders under section 115R at the rates ranging from 10 per cent to 30 per cent depending upon the type of fund.

    Such income distributed referred to in section 115R is exempt in the hands of unitholders under clause (35) of section 10.

    The Finance Act, 2020 has amended section 115R so that the distributed income is taxable in the hands of unitholders at the applicable rate and the mutual funds are not required to pay any DDT.

    In simple words, due to abolishment of DDT on the distributed income by the mutual funds to its unitholders and subsequent withdrawal of exemption of such income in the hands of the unitholders, the dividend income will now be taxable in the hands of the respective unitholders.

    Read more on the abolishment of DDT and its consequences here.

    Income from Mutual Fund subject to TDS under section 194K


    Effective April 1, 2020, any income paid to any resident by a Mutual Fund specified in section 10(23D) will attract TDS on such income.

    When the provision was proposed in the Finance Bill, 2020 it was interpreted that ‘any income’ shall not only include dividend income distributed by the Mutual Funds but shall also include capital gain income arising on redemption of mutual fund units.

    Thereafter, in order to remove the ambiguity, the CBDT has clarified that section 194K shall apply only in the case of payment of dividend income to unitholders and not on the capital gain income.

    Thereafter, a suitable amendment is made in the Finance Act, 2020 to exclude its operation on income in the nature of capital gains arising from the redemption of mutual fund units.

    Which Mutual Funds Schemes will attract TDS - Section 194K


    Mutual Fund Schemes have the following three options available - Whether invested through Regular Mode or Direct Mode:

    1. Dividend Payment Option

    2. Dividend Reinvested Option

    3. Growth Option

    Only the first two options declare and pay dividends. In the growth option, the investor has to redeem the units for cash inflows. Whereas, in dividend options, the mutual fund schemes declare dividend periodically to ensure the flow of income regularly.

    Since TDS is applicable only on dividend income under section 194K, hence, dividends so paid will be subject to TDS. It may be noted that even in case of reinvestment of dividend, the reinvestment itself constitutes payment of dividend and hence TDS shall apply on reinvested dividend amount also.

    In case of growth option, the payment is made to the investor only on redemption which gives rise to capital gains income and hence no TDS shall apply on capital gain income under section 194K or under any other provision of income tax.

    Further, dividend from any type of mutual fund scheme is covered for TDS under this section. It is immaterial whether the scheme is equity-oriented or debt-oriented. All schemes are covered. 

    When TDS does not apply on income from mutual fund units under section 194K


    Under the following two circumstances, TDS does not apply on income from mutual fund units under section 194K-

    1. When the aggregate of dividend income does not exceed Rs 5,000 in a financial year, there shall be no TDS. 

    In other words, where the aggregate amount of dividend income credited or paid during the financial year does not exceed Rs. 5,000, there is no requirement to deduct TDS. 

    However, it should be noted that once the dividend income exceeds Rs. 5,000, TDS shall be applicable on the whole amount of dividend income and not dividend income in excess of Rs. 5,000.

    In common parlance, the limit of Rs. 5,000 is called threshold limit. Hence, the threshold limit is Rs. 5,000 for section 194K.

    2. TDS on income from mutual funds does not apply where the income is in the nature of capital gains. This condition applies on the redemption of mutual fund units - be it dividend option or growth option.

    Rate of TDS on income from mutual fund units under section 194K


    The prescribed rate of TDS under section 194K for the purpose of deduction income tax or TDS is 10%.

    Hence, if the aggregate amount of dividend paid to the investor in a financial year exceeds Rs. 5,000, TDS @ 10% shall apply on the whole amount of dividend income.

    Once the tax is deducted in the dividend income, the same will reflect in his Form 26AS and the investor’s ITR will be prefilled with the dividend income. In case, the investor tax liability is Nil or less than the tax deducted, he has to file his ITR and claim the excess deduction of TDS as a refund from the income tax department.

    The rate of TDS of 10 per cent shall apply where the investor has provided his PAN or Aadhaar Number to the deductor. In case no PAN or Aadhaar Number is furnished, then as per section 206AA, a higher rate of TDS of 20 per cent shall be applicable instead of 10 per cent. Since PAN is mandatory for opening a mutual fund account and is required to be provided as KYC documents, this situation will seldom arise.

    Can TDS on income from mutual fund units be saved with Form 15G or Form 15H


    As we can see that the threshold limit under section 194K is Rs. 5,000 only. However, an investor may have for various reasons no tax liability during a year. One such case is that the investor’s total income from all the sources may be less than the basic exemption limit of Rs. 2,50,000.

    In order to provide relief to these categories of taxpayers from TDS on incomes, the income tax law has enshrined the provisions of filing of Form No. 15G and Form No. 15H to the payer or deductor by the payee so that TDS on income can be saved.

    Please remember, with the Form 15G or Form 15H TDS can be saved but not the income tax liability on the income. Nowadays, even the income on which no income tax is deducted by virtue of the filing of Form 15G or Form 15H is required to be reported by the deductor to the income tax department which is then reflected in the payee’s Form 26AS.


    It must be remembered that there must be enabling provisions in the law to provide for submission of Form 15G or Form 15H to the deductor. If there is no provision in the law, then no Form 15G or Form 15H can be submitted to the deductor for non-deduction of TDS.

    Section 197A of Income Tax Act, 1961 and Rule 29C of Income Tax Rules, 1962 contain the provisions related to the furnishing of Form 15G and Form 15H for non-deduction of income tax or TDS on certain incomes.

    Notably, there is no amendment in section 197A by the Finance Act, 2020.

    As per Rule 29C, Form 15G can be furnished for incomes specified in section 197A(1) or under section 197A(1A) and Form No.15H is furnished under section 197A(1C) of the Income Tax Act, 1961.

    Section 197A(1) and section 197(1A) covers the following sections of TDS and hence Form 15G or Form 15H can be filed for these incomes which are subject to TDS-

    Nature of Income
    Section under which tax is deductible
    Dividend
    Section 194
    Deposits under National Savings Scheme
    Section 194EE
    Payment from Employees' Provident Funds
    Section 192A
    Interest on securities
    Section 193
    Interest other than interest on securities
    Section 194A
    Insurance Commission
    Section 194D
    Life Insurance Policy maturity proceeds
    Section 194DA
    Rent
    Section 194I
    Income from Mutual Fund units
    Section 194K

    From the above table, it can be seen that section 197A already covers section 194K. This is because, as stated earlier, section 194K was already in statute prior to its omission by Finance Act, 2016 but section 197A was not amended to exclude section 194K.

    Since Finance Act, 2020 once again reintroduced section 194K for the same nature of income from mutual fund units, section 197A shall continue to apply for section 194K and hence Form 15G and Form 15H can be filed by the investor for non-deduction of TDS from payment of dividend income from mutual fund units.

    However, submission of Form 15G and Form 15H is subject to conditions specified in section 197A.

    Conditions for furnishing Form 15G

    The following are the conditions specified for furnishing Form 15G:

    1. Form 15G can be furnished only if the dividend income from a mutual fund scheme(s) does not exceed the basic exemption limit of Rs. 2,50,000.

    2. In case, Form 15G is furnished by an Individual then only an individual who is not a senior citizen can file Form 15G.

    3. Since section 194K is applicable for a resident investor, hence only a resident investor can file Form 15G. A Non-resident cannot file Form 15G for non-deduction of TDS on income from mutual funds under section 194K.

    4. Firms and Companies are ineligible to furnish Form 15G under any circumstances.

    Conditions for furnishing Form 15H

    The following are the conditions specified for furnishing Form 15H: 

    1. Form 15H can be furnished even if the dividend income from a mutual fund scheme(s) exceeds the basic exemption limit of Rs. 2,50,000.

    2. Form 15H can be furnished if the tax liability on total income is Nil for the relevant financial year.

    3. Form 15H can be furnished only by an individual who is a resident senior citizen. Hence, a non-individual person like firms, companies, trusts, society, etc cannot file Form 15H.

    4. Since section 194K is applicable for a resident investor, hence only a resident investor can file Form 15H. A Non-resident cannot file Form 15H for non-deduction of TDS on income from mutual funds under section 194K. Further, Form 15H is applicable for resident senior citizens only.

    Lower TDS Certificate under section 197 for a company or a Firm


    A Company or a firm is not eligible to furnish Form 15G. However, it can apply for a Lower or Nil TDS certificate under section 197 of the Income Tax Act, 1961 and can furnish the same to the mutual fund.

    TDS on dividend income from units of mutual funds paid to non-residents/NRIs


    Where dividend income in respect of units of a Mutual Fund is paid to non-residents including NRIs then the provisions of section 196A shall apply. In the case of non-residents, section 194K will not apply.

    Section 196A was in statute but was made inoperative from 01-04-2003 by way of inserting a proviso in section 196A. This proviso is omitted by Finance Act, 2020 and hence section 196A is once again reactivated from 01-04-2020.

    Salient features of section 196A are outlined below-

    1. Section 196A is applicable on dividend income from units of a mutual fund paid to non-resident unitholders.

    2. There is no threshold limit prescribed in section 196A.

    3. The rate of TDS under section 196A is 20 per cent for non-resident unitholders compared to 10 per cent for residents u/s 194K.

    4. The rate of TDS of 20 per cent shall be required to be increased by applicable surcharge and Health & Education Cess.

    5. A non-resident cannot apply for a lower or nil rate of TDS certificate under section 197 because section 197 does not cover section 196A.

    A list showing provisions under which tax is deductible are eligible for lower TDS certificates u/s 197 is given below-

    Nature of Income
    Section under which tax is deductible
    Income from Salary
    Section 192
    Interest on Securities
    Section 193
    Dividend
    Section 194
    Interest other than interest on securities
    Section 194A
    Payment to Contractors
    Section 194C
    Insurance Commission
    Section 194D
    Commission, etc., on the sale of lottery tickets.
    Section 194G
    Commission or Brokerage Income
    Section 194H
    Rent Income
    Section 194-I
    Payment of Professional and Technical fees
    Section 194J
    Income from Mutual Fund units
    Section 194K
    Payment of compensation on acquisition of certain immovable property
    Section 194LA
    Income in respect of units of investment fund
    Section 194LBB
    Income in respect of investment in securitization trust
    Section 194LBC
    TDS by Individuals on Contract, Commission and Professional fees
    Section 194M
    TDS on payments by e-Commerce Operator
    Section 194-O
    Payment to Non-Residents
    Section 195

    Credit for TDS on dividend income from the units of mutual funds held by a minor child


    In case the dividend income from the units of mutual funds held in the name of a minor child is liable to be clubbed with the income of the parent of the minor child under section 64(1A) then the parent should submit a declaration under section 199 read with Rule 37BA(2) of the Income-tax Rules, 1962 to the Mutual Fund.

    If such a declaration is filed by the parent, then the TDS will be credited to the PAN of the parent who can claim the same in his ITR and also include the dividend income in his total income.

    Practical Issues


    Unlike interest income on bank deposits where the payment of interest and the frequency of payment is fixed, the dividend income is not paid on a fixed period. Further, the amount of dividend is also not fixed and varies. A fund may declare a dividend at any point of time - at the beginning or mid or even at the end of the year. Further, a Fund may declare dividend more than once in a financial year. This is due to the fact that dividend declaration by a mutual fund scheme depends on the fund's performance over a period of time and is linked to the market returns. It may so happen that in a financial year a mutual fund scheme may not declare any dividend.

    Since this provision has been made applicable from 1st April 2020, it is to be seen how mutual funds introduce the facility to submit the Form 15G or Form 15H.

    Salient features of section 194K


    In the nutshell, the salient features of section 194K are as follows-

    1. This section shall apply only to resident unitholders.

    2. This rate of TDS is 10 per cent. In non-PAN/non-Aadhaar cases, the rate of TDS shall be 20 per cent.

    3. A threshold limit of Rs 5,000 is provided so that income below this amount does not suffer tax deduction. This threshold limit is applicable to all types of unitholders.

    4. The threshold limit of Rs. 5,000 shall apply even in non-PAN /non-Aadhaar cases.

    5. CBDT vide a press release dated 04.02.2020 has clarified that a Mutual Fund shall be required to deduct TDS @ 10% only on dividend payment and no tax shall be required to be deducted by the Mutual Fund on income which is in the nature of capital gains. This is also enshrined in law.

    This amendment has come into effect from 1st April, 2020.



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    2 Comments

    1. Earlier years dividend on equity and mutual funds were exempted from tax upto Rs10 lacs per annum. Now suddenly small investors who receive even small dividend amount of 5001 onwards are subject to tax. This has affected middle class citizens very much.

      ReplyDelete