Categories: Mutual FundTax Planning

Sec.194K – TDS on Mutual Fund Income – How to avoid TDS?

Effective from 1st April 2020 under Sec.194K – TDS on Mutual Fund Income will be deducted. What is the applicable TDS rate for this section and which income is eligible for TDS?

Types of Income in Mutual Funds

When you invest in Mutual Funds, then there are two types of income for you.

Capital Gain-In my earlier post, I have written a detailed post on how much the capital gain tax you have to pay for FY 2020-21. Refer the same “Mutual Fund Taxation FY 2020-21 (AY2021-22)“.
Dividend Income-Earlier Tax on the dividend (DDT) paid by Mutual Fund Companies on behalf of the investors. But due to the Budget 2020 rules, you have to pay the tax on it and TDs will be applicable on such dividend income.

Sec.194K – TDS on Mutual Fund Income

A new Sec.194K was introduced in Budget 2020. This will be effective from 1st April 2020. This new section abolished the older section 10(35) of the Income-tax Act, 1961.

As per new Section 194K, any person responsible for paying an income to a resident with respect to:

1. Units of a Mutual Fund as per Section 10(23D)

2. Units from the Administrator

3. Units from a specified company

at the time of credit of such income to the payee’s account exceeding Rs.5,000 or at the time of making payment, whichever is earlier, shall deduct TDS @10% (This rate is from 1st April to 13th May 2020). Due to the Corona Virus, the Government slashed the TDS rate from 14th May 2020 to 31st March 2020. Hence, during this period, the reduced TDS rate is 7.5%.

Earlier, dividends used to tax twice. At first, when the dividend paid from companies (stocks) to mutual fund companies and the second level is when the mutual fund companies pay the dividend to investors (through Dividend Distribution Tax).

By abolishing hte DDT, now the responsibility to pay the tax on such dividend is transferred to the investors directly. Because of this, the TDS on such income at the distribution level (Mutual Fund Companies level) is introduced.

TDS is not applicable if the dividend income is less than Rs.5,000. However, Mutual Fund companies adopted the different strategy.

Few important points of such TDS under Sec.194K

All types of Mutual Fund schemes are covered under the new tax regime, i.e. equity-oriented and other than equity-oriented mutual fund schemes under dividend payout and dividend reinvestment options.
TDS is required to be deducted at the time of credit of such income to the account of the unitholder or payment of any income to unitholder, whichever is earlier.
The amount of DIVIDEND REINVESTED under the dividend reinvestment option will be deemed as a dividend paid and accordingly, TDS provision shall apply.
The threshold limit to deduct the TDS on such dividend income is Rs.5,000. However, due to the practical difficulties faced by Mutual Fund Companies, they started to deduct the TDS on all such dividend payouts. It is the responsibility of the investors to show the same during IT Filing and claim back the TDS if the total dividend income in a financial year is less than Rs.5,000.
For NRIs, the TDS rate is different. As per section 196A of the Act, TDS at the rate of 20% (plus applicable surcharge and cess) should be deducted on dividend income credited/paid to NRIs. There is no threshold limit applicable in case of dividend income credited/paid to NRIs.
If your folio is not registered with PAN, then the TDS rate is 20% (This rate is from 1st April to 13th May 2020). Due to the Corona Virus, the Government slashed the TDS rate from 14th May 2020 to 31st March 2020. Hence, during this period, the reduced TDS rate is 15%.
As per section 64(1A) of Act, the income of minor child gets clubbed with the income of the parent for tax purposes. Accordingly, the parent should provide a declaration under section 199 of the Act read with Rule 37BA(2) of the Income-tax Rules, 1962 to the Mutual Fund for TDS deduction under the PAN of the parent. In the absence of such a declaration, the Mutual Fund should deduct TDS on dividend credited/paid under the PAN of the minor.
The TDS Certificate will be generated on the TRACES portal by the Mutual Fund and issued to the unitholders on a quarterly basis as specified under the law.
A resident unitholder may make an application to the income-tax authorities under section 197 of the Act for obtaining a certificate for lower / non-deduction of TDS on dividend income credited/paid by Mutual Fund.

Sec.194K – TDS on Mutual Fund Income – How to avoid TDS?

A person (not being a company or firm) can submit Form No.15G15H to Mutual Fund for non-deduction of TDS under section 194K of the Act provided that the tax on his estimated total income (including such dividend received from Mutual Fund) of the financial year is nil.

It is recommended that the form should be submitted on an annual basis at the start of the financial year.

Conclusion:-Do remember that Tax and TDS are applicable on Dividend income under this section. TDS rate is 10% (This rate is from 1st April to 13th May 2020). Due to the Corona Virus, the Government slashed the TDS rate from 14th May 2020 to 31st March 2020. Hence, during this period, the reduced TDS rate is 7.5%. However, your PAN has not linked then TDS rate is at 20% (This rate is from 1st April to 13th May 2020). Due to the Corona Virus, the Government slashed the TDS rate from 14th May 2020 to 31st March 2020. Hence, during this period, the reduced TDS rate is 15%. You can still submit Form15G/15H and avoid TDS. But avoiding TDS does not mean avoiding tax. Also, check the eligibility before submitting the Form15G/H to the mutual fund companies. Due to difficulties in understanding your minimum threshold limit of Rs.5,000, mutual fund companies started to deduct the TDS from all your dividend income.

Refer our latest posts:-

BasuNivesh

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View Comments

GsB says:

October 9, 2021 at 12:08 PM

Hi, very useful information. I do have a question - I have received some dividend from my MF and although the dividend is less than 5000, 7.5% tax was created (as highlighted by you). I do not have any other dividend and so the total value of dividends is less than 100000 and so I should be able to claim the tax back. Can you highlight how can I claim the tax back?
- BasuNivesh says:
  
  October 9, 2021 at 5:57 PM
  
  Dear GsB,
  Yes, you can claim that deduction back.
Chandrashekar K says:

April 21, 2020 at 1:06 PM

Thank you so much sir for the clarification.
Can you please provide the formula for grandfathering to arrive at revised purchase price ?
- Basavaraj Tonagatti says:
  
  April 21, 2020 at 7:15 PM
  
  Dear Chandrashekar,
  Refer my blog post on mutual fund taxation (link shared in the above post).
Chandrashekar K says:

April 21, 2020 at 11:08 AM

Good Morning sir, I had invested in Aditya Birla Dynamic Bond fund on 21 Nov 2016 & redeemed the same on 22 Nov 2019 thereby completing 3 years holding period of Debt fund to qualify for indexation based Capital gain tax.

However since the investment is Prior to 31st January 2018, (1) do I need to apply Grandfathering formula & then add to it with indexation to arrive at my revised purchase price OR (2) Consider only indexation to arrive at revised purchase price OR (3) Consider only Grandfatherting formula to arrive at revised purchase price.

Kindly guide on the above query

Thanks & best regards
Chandrashekar.K
Mob : 99453 55997
- Basavaraj Tonagatti says:
  
  April 21, 2020 at 11:42 AM
  
  Dear Chandrashekar,
  Grandfathering is for equity funds but not for debt funds.
vijay jain says:

April 10, 2020 at 2:44 PM

Sir,

Is TDS applicable on Capital Gain of Growth Plan also?
- Basavaraj Tonagatti says:
  
  April 10, 2020 at 2:45 PM
  
  Dear Vijay,
  As pointed above, TDS is applicable only on Dividend options.