What is Section 194NF and How Does it Affect Unit Holders of Business Trusts and Investment Funds?
The Indian Income Tax Act contains multiple provisions for the deduction of tax at source (TDS) to ensure efficient tax collection. One such provision is Section 194NF , which was introduced to bring more transparency in the taxation of income distributed by business trusts and investment funds. This section applies specifically to the income earned by unit holders from these entities.
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What is a Business Trust or Investment Fund?
Definition and explanation of business trusts and investment funds
A business trust is a legal structure like a Real Estate Investment Trust (REIT) or Infrastructure Investment Trust (InvIT). Similarly, investment funds are pooled vehicles where investors’ money is combined and invested in different instruments such as equities, debt, or real estate.
Types of income distributed by these entities (interest, dividends, capital gains, etc.)
Business trusts and funds generate income from various sources, such as:
- Interest income on loans advanced by the trust.
- Dividends received from investments in companies.
- Capital gains on sale of assets or securities.
- Rental or operational income in case of REITs.
This income is distributed among unit holders, and Section 194NF ensures TDS compliance on such payouts.
What is Section 194NF?
Introduction and effective date (from April 1, 2021)
Section 194NF was introduced with effect from April 1, 2021, as part of amendments to the Income Tax Act.
Overview of TDS requirement at 10% on income distributed by business trusts or investment funds to unit holders
Under this section, any income distributed to unit holders by business trusts or investment funds is subject to TDS at the rate of 10%.
Responsibility of trustee, fund manager, or authorized person for TDS deduction
The responsibility to deduct TDS lies with the trustee, fund manager, or authorized representative managing the entity.
Types of income covered under Section 194NF
- Interest income distributed to unit holders.
- Dividends distributed by the trust or fund.
- Certain capital gains distributions (except exempted categories).
Exceptions to Section 194NF
Income below Rs. 5,000 to resident individuals or Hindu Undivided Families (HUFs)
If the distributed income does not exceed ₹5,000 in a financial year for resident individuals or HUFs, no TDS will be deducted.
Income below Rs. 1,000 to other persons (non-individual, non-HUF)
For other categories of unit holders, TDS will not apply if the income is below ₹1,000.
Exemption for capital gains from long-term capital asset transfer
Long-term capital gains from the transfer of units or securities are exempted from TDS under this section.
Income from Special Economic Zone (SEZ) developers or units
Certain SEZ developers and units enjoy exemption from TDS under Section 194NF.
Other exemptions if applicable
Exemptions notified by the Central Board of Direct Taxes (CBDT) or amendments in the Finance Acts may also apply.
Conclusion
Section 194NF ensures that tax is deducted upfront on income distributed by business trusts and investment funds to unit holders. By placing the onus of compliance on trustees or fund managers, this provision streamlines tax collection and prevents revenue leakage. Investors should be mindful of the TDS provisions, thresholds, and exemptions to manage their post-tax income effectively.
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Frequently Asked Questions (FAQs)
- What is Section 194NF and who does it apply to?It is a TDS provision applicable to income distributed by business trusts and investment funds to their unit holders.
- What types of income are covered under Section 194NF?Primarily interest and dividends, along with some capital gains distributions.
- Who is responsible for deducting TDS under Section 194NF?The trustee, fund manager, or authorized person managing the entity.
- What are the exceptions to Section 194NF?Income below ₹5,000 for resident individuals/HUFs and ₹1,000 for others, along with certain exemptions like SEZ units and long-term capital gains.
- What is the threshold limit for TDS deduction under Section 194NF?₹5,000 for resident individuals/HUFs and ₹1,000 for non-individuals.
- How does Section 194NF affect unit holders of business trusts and investment funds?It reduces the actual payout received, as TDS is deducted before distribution. Unit holders can claim credit while filing income tax returns.
- What are the consequences of non-compliance with Section 194NF?Failure to deduct or deposit TDS can attract interest, penalties, and prosecution under the Income Tax Act.
