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Section 194K: TDS on income from units of mutual funds or UTI

The finance act 2020, with effect from 01.04.2020 has removed the dividend distribution tax (DDT) on payment of dividend income by companies and made the same taxable in the hands of respective individual share-holder/unit-holder. Since now companies and mutual funds are not required to pay DDT, the finance act 2020 has introduced section 194K for deduction of tax at source (TDS) on income earned from units of mutual funds and unit trust of India.

To whom section 194K is applicable?

Section 194K applies to any resident person, who has earned income from units of mutual funds or units of unit trust of India. This means that income earned by any resident individual, Hindu undivided family, partnership firm, company, local bodies, association of person or bodies of individual or any other artificial juridical person are subject to provision of TDS under section 194K.

Who is required to deduct TDS under section 194K and what is the time limit of TDS deduction?

According to section 194K, TDS is required to be deducted by any person who is responsible for paying any income in respect of

a. units of a Mutual Fund specified under clause (23D) of section 10; or

b. units from the Administrator of the specified undertaking; or

c. units from the specified company

Here for the purpose of section 194K

a. “Administrator” means the Administrator as referred to in clause (a) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;

b. “specified company” means a company as referred to in clause (h) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002;

c. “specified undertaking” shall have the meaning assigned to it in clause (i) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002.

Further TDS under section 194K is required to be deducted at the time of making the payment or at the time of credit of such income in the account of unit-holder, whichever is earlier.

What is the deduction limit and rate of TDS under section 194K?

TDS under section 194K is required to be deducted at the rate of 10%. However, no deduction is required in the following cases:-

a. If the aggregate of such income does not exceed Rs 5000 for the year or

b. If the income is of the nature of capital gains.

Whether TDS deducted under section 194K can be claimed in the income tax return?

Yes, TDS deducted under section 194K can be claimed in the income tax return and can be set off with the final tax liability of a person, if any. Further refund can also be claimed if TDS deducted is more than the final tax liability ascertained in the income tax return.

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