What’s New in Section 194 of the Income Tax Act after Budget 2020?

A nation’s growth depends on the investments made by the government in different facets of the economy. In India, the Union Budget depicts the future of the nation in terms of estimated expenditure in healthcare, infrastructure development, agriculture and more. Budget 2020, as stated by the Finance Minister, Nirmala Sitharaman, has been designed to boost the income of people in India.

Related to the mutual funds in India, Union Budget 2020 also proposed to insert a new section, 194K to the existing Income Tax Act. Under this new section, the Ministry has proposed to tax the income from mutual funds in India. To be more specific, the income from mutual fund investments will now be subjected to a 10% Tax Deducted at Source (TDS).

Let’s find out more about the updates related to mutual funds in India in detail.

Section 194K – The New Face of TDS in the Income Tax Act

As per Clause 8o of the Finance Bill 2020, the finance ministry has recommended adding a new section, 194K, below 194J of the Income Tax Act. This section includes the proposal of levying a tax on the income from investments done through mutual funds in India.

Before the introduction of this clause in the Act, only NRI investors had to pay the TDS and not Indian residents. Also, you were liable to pay TDS at 10% only if your income from mutual funds in India exceeds one lakh rupees. Now, the upper limit of income determining your tax liability is five thousand rupees. Furthermore, the tax will be levied only on the dividend payment, as clarified by the Central Board of Direct Taxes (CBDT). Before this clarification came into the picture, the proposal created doubts amongst investors about whether the entire capital gains will be taxed at the source.

New Income Tax Regime as Per Budget 2020

Mutual fund investment in India is not the only aspect that has faced a critical amendment in the laws. The government has also announced new income tax slab rates for Indian citizens, with income falling into various categories.

Income Slab Tax Rate
Between Rs. 5 Lakh to Rs. 7.5 Lakh Lowered from 20% to 1o%
Between Rs. 7.5 Lakh to Rs. 10 Lakh Lowered from 20% to 15%
Between Rs. 10 Lakh to Rs. 12.5 Lakh Lowered from 30% to 20%
Between Rs. 12.5 Lakh to Rs. 15 Lakh Lowered from 30% to 25%
Above Rs. 15 Lakh Still at 30%; no change

What should Mutual Fund Investors do to Increase Gains?

Experienced investors who know how to invest through mutual funds in India might need to restructure their investment strategy as per the new budget. If you have plans to invest through mutual funds this year, here are two tips to keep in mind:

  • Maintain A Good Savings/Investment Ratio

Along with investing your money, you should think of saving it too. Keeping aside around 20% of your earnings as savings is a good option. For investing through mutual funds in India, choose debt funds and equity funds for short-term and long-term goals respectively.

  • Choose Growth Over Dividend Option

One flexibility you get while investing through mutual funds in India is to either receive a regular income from your investment or let it stay invested. The former choice is the dividend option, while the latter is the growth option. Since the income from mutual funds in India will be taxed at your end, it makes more sense to choose the growth option, particularly when your income falls into higher tax brackets.

With time, every investor needs to redefine their investment strategy as per the changing dynamics of the mutual fund industry. Since Union Budget 2020 will have its impact on the returns from your investments, make sure you think twice before deciding to invest money. To better understand how to define a new investment plan, seek help from financial advisory firms, such as FinEdge.


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