Section 194K : TDS on Dividend from Mutual Funds

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Sakshi Shah

Form 16A
Form 26Q
Mutual Fund
Sec 194K
TDS
TDS Sections

Under Budget 2020 applicable from 1st April 2020 i.e. FY 2020-21, Dividend Distribution Tax (DDT) was abolished. As a result, the dividend received on equity shares and mutual funds which was earlier exempt is now taxable at slab rates. It is taxable in the hands of the shareholder. Since the income would be taxable in the hands of the shareholder, TDS would be applicable. As a result, the Finance Minister introduced a new Section 194K to deduct TDS on Dividend from Mutual Funds.

The person paying dividend on mutual funds should deduct TDS u/s 194K. The deduction is @ 10% on the amount of dividend, only if a resident shareholder’s total dividend in a financial year exceeds Rs. 5,000. Sec 194K is applicable from 1st April 2020 i.e. FY 2020-21 onwards.

Section 194K TDS on Dividend from Mutual Funds

Section 194K – TDS on Dividend from Mutual Funds

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What is the meaning of ‘Income’ under Section 194K?

As per the Income Tax Act, ‘Income’ includes dividend paid on units of mutual funds specified under 10(23D) of Income Tax Act, units of mutual funds from a specified company or units of mutual funds from the administrator of the specified undertaking

There was confusion about whether the TDS under Section 194K on “Income from Mutual Funds” would include only dividends; or also include capital gains on the sale of MFs. On 4th Feb 2020, CBDT issued a clarification on this issue.

CBDT Clarification TDS @ 10% should be deducted on Dividend Income only and not on Income from Capital Gains on the sale of Mutual Funds. Here is the official clarification from CBDT.

CBDT Clarification - No TDS on Capital Gains in Sec 194K

FAQs

Are Capital Gains from the sale of Mutual Funds subject to TDS under Sec 194K ?

Sec 194K mentions TDS on ‘Income’ from Mutual Funds. There was confusion about whether capital gains income on the sale of MFs should be subject to TDS u/e 194K. However, the CBDT issued an official clarification on 02nd February 2020. Therefore, TDS needs to deducted at 10% on Dividend Income only. Additionally, it is not applicable for Income from Capital Gains on the sale of Mutual Funds.

Is TDS required to be deducted on dividend paid to NRI shareholder ?

Section 195 applies to the dividend paid to NRI investors/shareholders, as per provisions of the Income Tax Act. Hence, TDS needs to be deducted on the dividend at 20% on equity shares and equity mutual funds. Therefore, TDS has to be deducted at 10% as per Sec 194 and Sec 194K for an NRI shareholder.

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