Meaning of Section 194K
Section 194K of the Income Tax Act pertains to the deduction of Tax Deducted at Source (TDS) on income from mutual funds. This section was introduced to ensure tax compliance and prevent tax evasion on investment income. It applies to any person making payments in the form of income from mutual funds to a resident individual or entity.
Current TDS Rate and Threshold Limit
Under the existing provisions of Section 194K:
- A TDS rate of 10% is applicable on income earned from mutual funds.
- No TDS is deducted if the total income from mutual funds during a financial year does not exceed ₹5,000.
- The provision applies only to dividend income from mutual funds and not to capital gains.
Proposed Amendment
The government has proposed an amendment to increase the TDS limit under Section 194K. Key changes include:
- Increase in the TDS threshold: The limit for TDS deduction may be raised from ₹5,000 to a higher amount to provide relief to small investors.
- Clarification on applicable income: The amendment aims to specify the types of mutual fund incomes subject to TDS, particularly excluding capital gains.
- Compliance measures: Strengthening the compliance framework for better tax administration.
Types of Income from Mutual Funds
Investors can earn income from mutual funds in different ways:
Dividend Income
Earnings distributed by mutual fund schemes to investors. This is subject to TDS under Section 194K.
Capital Gains
Profits earned on the sale of mutual fund units. These are not covered under Section 194K but are taxed under capital gains provisions.
- Short-term capital gains (STCG) – Taxed at 15% for equity-oriented schemes.
- Long-term capital gains (LTCG) – Taxed at 10% for equity-oriented schemes if gains exceed ₹1 lakh in a financial year.
Penalties for Non-Deposit of TDS Under Section 194K
Failure to deduct or deposit TDS under Section 194K can lead to serious consequences:
- Interest Penalty: If TDS is not deducted, interest at 1% per month is levied. If deducted but not deposited, interest at 1.5% per month is applicable.
- Late Fee: A penalty of ₹200 per day under Section 234E until the TDS return is filed.
- Disallowance of Expenses: The amount of income on which TDS was not deducted may be disallowed as an expense for tax purposes.
- Prosecution: In severe cases, prosecution under Section 276B may be initiated, leading to imprisonment ranging from 3 months to 7 years along with fines.
Conclusion
Section 194K ensures tax compliance by mandating TDS deduction on mutual fund income. The proposed amendment aims to increase the threshold limit, providing relief to small investors while maintaining effective tax collection. Investors must stay updated with regulatory changes to avoid penalties and ensure smooth compliance with tax laws.