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 were earlier exempt under Section 10(35) of the Income Tax Act 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 dividends on mutual funds should deduct TDS u/s 194K. The deduction is at 10% on the number of dividends, only if a resident shareholder’s total dividend in a financial year exceeds INR 5,000. Section 194K is applicable from 1st April 2020 i.e. FY 2020-21 onwards.
Section 194K – TDS on Dividend from Mutual Funds
Mutual Fund distributing dividends to the investors of equity mutual funds should deduct TDS on such dividends. The deductor must deposit the TDS and file the TDS Return on TRACES.
Shareholder resident in India earning dividend income on equity mutual funds will receive the amount after TDS under Section 194K. Shareholder resident in India earning dividend income on equity shares will receive the amount after TDS under Section 194. NRI investors/shareholders, earning dividend income will receive the amount after deduction of TDS under Section 195.
Nature of Payment
Sec 194K covers Payment of Dividend on Equity Mutual Funds to a resident shareholder exceeding INR 5000 in a financial year.
Time of Payment
TDS shall be deducted at the time of credit of income to payee account or at the time of payment, whichever is earlier. If the payee of the amount credits the amount to be paid to “suspense account” or any other account, it is considered as ‘deemed payment’ and the payer must deduct TDS on such credit.
Deductor should deduct TDS u/s 194K at the rate of 10% if the dividend amount exceeds INR 5000. If the payee does not provide the PAN, TDS shall be deducted at the rate of 20%
Deductor shall issue Form 16A to the deductee as the Tax Credit Certificate of the amount deducted as TDS. The Deductor can download Form 16A from the account on TRACES. Using Form 16A, the deductee can claim credit of the tax deducted while filing Income Tax Return.
After depositing TDS with the income tax department, the deductor should file Form 26Q on TRACES. The details of the dividend payment are part of this report. The deductor, after filing the report, should provide Form 16A to the deductee.
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.
CBDTClarification – TDS at 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.
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.