CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
Section 194K — Income in Respect of Units (Tax Deducted at Source)
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Reinstated by the Finance Act, 2020 (w.e.f. 1 April 2020) on abolition of the income-distribution tax; recent in its current form.
Finance Act, 2026: No amendment.
Mechanism: The payer of income (other than capital gains) in respect of units of a mutual fund/specified undertaking/specified company to a resident deducts tax at 10% at the earlier of credit or payment, above the threshold.
Litigation profile: Sparse in its revived form. The live question is the distributed-income versus capital-gains boundary — the candour rule applies.
A. SECTION COMMENTARY
Section 194K requires any person responsible for paying a resident any income in respect of units of a mutual fund specified under section 10(23D), units from the Administrator of the specified undertaking, or units from the specified company, to deduct tax at ten per cent at the time of credit or payment, whichever is earlier, above the threshold. The section has a chequered history: an earlier section 194K was omitted with effect from 1 April 2003 when the income-distribution-tax regime exempted unit income in investors' hands; on the abolition of that regime by the Finance Act, 2020, unit income again became taxable in the investor's hands and section 194K was reinstated with effect from 1 April 2020.
Capital gains are excluded
The decisive feature is the Explanation, which excludes from section 194K income that is in the nature of capital gains. Accordingly, the deduction bites only on income distributed on units (the dividend-equivalent income), not on the gains arising on repurchase or redemption of the units. This confines the deduction to the income-distribution component and leaves the taxation of capital gains on units to be discharged by the unit-holder directly.
A recently-revived provision — candour
In its reinstated form section 194K is recent and has not generated a body of judicial authority. The live questions — the boundary between distributed income (within the section) and capital gains (excluded), and the parallel with section 194 for company dividends — are approached from the statutory language and from the cognate framework of the income-distribution-tax abolition. In candour, there is no direct section 194K merits authority.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
194K. Any person responsible for paying to a resident any income in respect of—
(a) units of a Mutual Fund specified under clause (23D) of section 10; or
(b) units from the Administrator of the specified undertaking; or
(c) units from the specified company, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent:
Provided that the provisions of this section shall not apply—
(i) where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person responsible for making the payment to the account of, or to, the payee does not exceed ten thousand rupees; or
(ii) if the income is of the nature of capital gains.
Explanation 1.—For the purposes of this section,—
(a) "Administrator" means the Administrator as referred to in clause (a) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002);
(b) "specified company" means a company as referred to in clause (h) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002);
(c) "specified undertaking" shall have the meaning assigned to it in clause (i) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002).
Explanation 2.—For the removal of doubts, it is hereby clarified that where any income referred to in this section is credited to any account, whether called "suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
C. AUTHORITIES
Candour rule observed: reinstated section 194K (w.e.f. 1 April 2020) has no direct authority. Only the statutory scheme and cognate context are offered.
Statutory position and cognate context
Distributed income versus capital gains — the Explanation
Principle: Section 194K applies only to income in respect of units other than income in the nature of capital gains; the gains on redemption/repurchase of units are outside the deduction and are charged in the unit-holder's hands.
Use: The gateway test that confines section 194K to the dividend-equivalent distribution.
Hindustan Coca-Cola Beverages (P) Ltd. v. CIT (2007) 293 ITR 226 (SC) — cognate on default
Principle: No second recovery from the deductor where the payee has paid the tax; section 201(1A) interest runs for the period of default.
Use: Governs the consequence of a failure to deduct under section 194K.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.
CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
Section 194K — Income in Respect of Units (Tax Deducted at Source)
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Reinstated by the Finance Act, 2020 (w.e.f. 1 April 2020) on abolition of the income-distribution tax; recent in its current form.
Finance Act, 2026: No amendment.
Mechanism: The payer of income (other than capital gains) in respect of units of a mutual fund/specified undertaking/specified company to a resident deducts tax at 10% at the earlier of credit or payment, above the threshold.
Litigation profile: Sparse in its revived form. The live question is the distributed-income versus capital-gains boundary — the candour rule applies.
A. SECTION COMMENTARY
Section 194K requires any person responsible for paying a resident any income in respect of units of a mutual fund specified under section 10(23D), units from the Administrator of the specified undertaking, or units from the specified company, to deduct tax at ten per cent at the time of credit or payment, whichever is earlier, above the threshold. The section has a chequered history: an earlier section 194K was omitted with effect from 1 April 2003 when the income-distribution-tax regime exempted unit income in investors' hands; on the abolition of that regime by the Finance Act, 2020, unit income again became taxable in the investor's hands and section 194K was reinstated with effect from 1 April 2020.
Capital gains are excluded
The decisive feature is the Explanation, which excludes from section 194K income that is in the nature of capital gains. Accordingly, the deduction bites only on income distributed on units (the dividend-equivalent income), not on the gains arising on repurchase or redemption of the units. This confines the deduction to the income-distribution component and leaves the taxation of capital gains on units to be discharged by the unit-holder directly.
A recently-revived provision — candour
In its reinstated form section 194K is recent and has not generated a body of judicial authority. The live questions — the boundary between distributed income (within the section) and capital gains (excluded), and the parallel with section 194 for company dividends — are approached from the statutory language and from the cognate framework of the income-distribution-tax abolition. In candour, there is no direct section 194K merits authority.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
194K. Any person responsible for paying to a resident any income in respect of—
(a) units of a Mutual Fund specified under clause (23D) of section 10; or
(b) units from the Administrator of the specified undertaking; or
(c) units from the specified company, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent:
Provided that the provisions of this section shall not apply—
(i) where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year by the person responsible for making the payment to the account of, or to, the payee does not exceed ten thousand rupees; or
(ii) if the income is of the nature of capital gains.
Explanation 1.—For the purposes of this section,—
(a) "Administrator" means the Administrator as referred to in clause (a) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002);
(b) "specified company" means a company as referred to in clause (h) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002);
(c) "specified undertaking" shall have the meaning assigned to it in clause (i) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002).
Explanation 2.—For the removal of doubts, it is hereby clarified that where any income referred to in this section is credited to any account, whether called "suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
C. AUTHORITIES
Candour rule observed: reinstated section 194K (w.e.f. 1 April 2020) has no direct authority. Only the statutory scheme and cognate context are offered.
Statutory position and cognate context
Distributed income versus capital gains — the Explanation
Principle: Section 194K applies only to income in respect of units other than income in the nature of capital gains; the gains on redemption/repurchase of units are outside the deduction and are charged in the unit-holder's hands.
Use: The gateway test that confines section 194K to the dividend-equivalent distribution.
Hindustan Coca-Cola Beverages (P) Ltd. v. CIT (2007) 293 ITR 226 (SC) — cognate on default
Principle: No second recovery from the deductor where the payee has paid the tax; section 201(1A) interest runs for the period of default.
Use: Governs the consequence of a failure to deduct under section 194K.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.