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Section 194K-TAX deduction on income from mutual fund


In the budget 2020 we all get to introduced with the section 194K in the finance Act. This section made for the deduction on the units of mutual fund of any residence of India.

There are different types of income which can be earned by the mutual fund units, the types of income have given below.

Dividend: – tax on the dividend (DDT) which is use to pay by the (Asset management company) on the behalf of investor .but in the new regime DDT has abolished according to the 2020 budget from 2020-21, so that the dividend income will be taxable by the part of investors or the receiver.

Capital gain: – capital gain is taxable by the hand of the investor or who receives the income, any of long term capital gain earned by mutual funds equity then that will be taxed at the rate of 10% and the other condition is the income which is earned that should not be greater than 1lakh in a financial year, similarly if the investors gained any short term capital gain and also subjected to STT, then that will be taxable at the rate of 15%. A mutual fund is not liable to deduct TDS on the capital gain arising on the redemption of the unit by the Unitholders.
Also there are the exception cases as well in which TDS are not required to be deducted, the cases are given below.

  • Tax @10%is not required to deduct if the earned income through mutual fund is should not be more than 5000 in the financial year.
  • Capital gain income is exempted from the applicability of section 194K.

Scope of the section 194K

This new provision section 194K published from the 1 April 2020 this new section provides the exemption in order to abolish section 10(35) which is income from the unit of mutual fund.

So according to the section 194K any person who is responsible for paying an income to the resident with the respect to:-

  • Unit from the administrator
  • Unit from specified company
  • Unit of the mutual fund as per section 10(23D)

So at the time of crediting the amount to account of payee which is exceeding 5000 or at the time of making payment, tax will be deduct as whichever is earlier.

Purpose of section 194K

According to the current income tax law, dividend use to taxed two times, initially the tax was imposed when the companies pays the dividend to the asset management companies and the second time use to imposed when the asset management companies distributes the profit between unit holders. So that’s why in this new tax regime DDT is abolished and only the AMC are required to deduct TDS @10%

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