TDS on Mutual Funds and National Savings Scheme – Relevant Provisions

TDS on Payment of Dividend on Mutual Fund [Section 194K]:

Budget 2020 introduced Section 194K which proposes a tax deduction on the amount paid on the units of mutual funds, without a limit, to any resident individual. Earlier such income was exempt from Income Tax under section 10(35). Hence,this new section abolished the older section 10(35) of the Income-tax Act, 1961.This section has come into effect from 1st April 2020.

Section 10(35):

The provisions of section 10(35) offer exemption towards the following:

• Any income arising in respect of the units of the specified mutual fund; or
• Any income arising in respect of the units from the Administrator of the specified undertaking; or
• Any income arising in respect of the units from the specified company.

Thus, in case the income falling within the criteria mentioned above, the entire income was exempted under section 10(35) of the Income Tax Act.

However, with the insertion of section 194K,no exemption under section 10(35) would be available to income arising in respect of units received on or after 1st April 2020.

Nature of Income covered under Section 194K:

• Provisions of section 194K are applicable only on payment of dividends by fund houses. No TDS shall be deducted on capital gains arising on redemption of units. Provisions of section 194K are applicable to
  following incomes:
• Units of a Mutual Fund: Mutual fund means units specified under section 10(23D) of the Income Tax Act.
• Units from the Administrator: Administrator means the Administrator, as referred under section 2(a) of the Unit Trust of India (Transfer of the Undertaking and Repeal) Act, 2002.
• Units from a Specified Company: Specified company means the company as referred under Section 2(h) of the Unit Trust of India (Transfer of the Undertaking and Repeal) Act, 2002.

Liability to Deduct TDS:

The liability to deduct TDS under this section rests on the shoulders of Mutual Fund Houses distributing dividends to the investors. The deductor must deposit the TDS and file the TDS Return on TRACES.

Deductee under this Section:

• 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.

Rate and Threshold Limit for TDS Deduction:

• TDS shall be deducted at the rate of 10% on the amount of dividend paid.
• If a valid PAN is not furnished by the deductee, TDS shall be deducted at the rate of 20%.
• Threshold Limit for TDS deduction is Rs. 5000. This means no TDS shall be deducted if the total dividend paid/payable in a financial year does not exceed Rs. 5000.

TDS on Repurchase of Units by Mutual Fund or Unit Trust of India [Section 194F]:

Section 194F deals with TDS on payment relating to repurchase of units of Mutual Funds or Unit Trust of India.Under this section,liability to deduct TDS arises on payment of such amount as referred to in Section
80CCB of the Acton repurchase of units issued by them.

Nature of Income Covered:

This section becomes applicable at the time of making payment of any amount referred to in referred to in section 80CCB (2).

Section 80CCB(2):

• Section 80CCB (2) of the Income Tax Act refers to the amount which is invested by the assessee in the units being issued under a plan formulated under the Equity Linked Savings Scheme.
• The amount so invested has been allowed as a deduction, however, the amount invested (whole or part) is returned back to the assessee by the Fund / Trust either by way of repurchase of the units or on the termination of the plan.

Liability to deduct TDS under this Section:

• The mutual fund house or the UTI responsible for paying to any person any amount referred to in sub-section (2) of section 80CCB shall is liable to deduct on such amount.

Rate of TDS and Threshold Limit:

• TDS shall be deducted at the rate of 20%at the time of payment of amount as referred to in Section 80CCB of the Act. Please note that there is no exemption limit provided under section 194F. This means TDS shall be deducted irrespective of quantum of payment.

TDS on Payment for Deposit under National Savings Scheme (NSS) [Section 194EE]:

National Savings Scheme is a fixed-income investment scheme backed by the Government of India. The savings bond is suitable for small and medium-income investors to save tax while earning returns. This is a secure and
low-risk product. The primary objective of such schemes is to mobilize savings and help individuals build a substantial corpus eventually. The rates of return under such schemes are revised frequently. The fact that this
scheme is backed by the Government makes it a safe investment options and a preferred instrument for millions of small investors across India.

Liability to Deduct TDS:

Section 194EE of the Income Tax Act, 1961 mandates deduction of TDS on withdrawal of amount deposited under the National Saving Scheme. This section states that the person making payment of amount referred to in section
80CCA(2)(a) is required to deduct TDS.

Rate of TDS and Threshold Limit:

The TDS under section 194EE shall be deducted at the rate of 10%.

Exemption from TDS Deduction under this section:

No TDS shall be deducted under section 194EE in following cases:

• If the aggregate amount of payments in a financial year does not exceedRs. 2,500.
• Where the payment is made to the heirs of the deceased assessee (depositor), no tax shall be deducted at source.
• If a declaration is submitted under section 197A by the recipient to the payer, then no tax is deductible.