TDS on income from units: Section 196B

Introduction

The Indian government introduced the concept of TDS (Tax Deducted at Source) to ensure a regular flow of income tax revenue. TDS is a tax that is deducted at the source of income. It is a mechanism to collect tax in advance, and the amount collected is then credited to the taxpayer’s account. This system ensures a regular and consistent flow of revenue to the government. Section 196B of the Income Tax Act, 1961, is one such provision that mandates the Tax Deduction at Source on Income from units. In this blog, we will delve deeper into the details of Section 196B, its applicability, and the procedure for TDS.

What is Section 196B?

Section 196B of the Income Tax Act, 1961, deals with the deduction of TDS on income from units. As per this section, any person responsible for making payment of income in respect of units of a mutual fund shall deduct tax at source at the rate of 10% at the time of payment or credit to the payee’s account.

Applicability of Section 196B

The provision of Section 196B is applicable to income received from the following units of mutual funds:

1. Units of a mutual fund specified under section 10(23D) of the Income Tax Act, 1961.
2. Units of the UTI (Unit Trust of India).
3. Units of a specified company.
4. Any other unit may be notified by the Central Government.

Note: It is important to note that the provision of Section 196B is not applicable to the following:

1. Income received by a resident individual or Hindu Undivided Family (HUF) from units of a mutual fund specified under section 10(23D) of the Income Tax Act, 1961.
2. Income received by a resident individual or HUF from units of the UTI.
3. Income received by a resident individual or HUF from units of a specified company.
4. Income received by a non-resident or a foreign company.

Procedure for TDS under Section 196B

The procedure for TDS under Section 196B is as follows:

1. The person responsible for making payment of income in respect of units of a mutual fund shall deduct tax at source at the rate of 10% at the time of payment or credit to the payee’s account.
2. The deducted TDS shall be deposited to the credit of the Central Government within seven days from the end of the month in which the deduction is made.
3. The person responsible for deducting the TDS shall issue a certificate of deduction of tax at source in Form No. 16A to the payee within fifteen days from the due date.
4. The payee can claim credit for the TDS deducted while filing their income tax return.

Penalty for Non-Compliance

Non-compliance with the provisions of Section 196B may attract a penalty under Section 271C of the Income Tax Act, 1961. As per this section, if a person fails to deduct TDS or deducts TDS but fails to deposit the same to the credit of the Central Government,  then they may be liable to pay a penalty equal to the amount of tax that was required to be deducted or deposited.

Conclusion

Section 196B of the Income Tax Act, 1961, is an important provision that mandates TDS on income from units. The provision is applicable to income received from units of a mutual fund specified under section 10(23D) of the Income Tax Act, 1961, units of the UTI, units of a specified company, and any other unit as may be notified by the Central Government.