Section 196A of the Income Tax Act, 1961 governs the Tax Deducted at Source (TDS) on income paid to non-residents (including foreign companies) from units of Mutual Funds or the Unit Trust of India (UTI).
1. Applicability
- Applies to income from unitsof:
- Mutual Funds(under Section 10(23D))
- Unit Trust of India (UTI)
- Payee must be:
- A non-resident individual(not a company) or
- A foreign company.
2. TDS Rate
- Default rate: 20%(flat, without surcharge/cess at deduction stage).
- DTAA Benefit: If a lower rateapplies under a tax treaty, TDS can be reduced if the payee submits a Tax Residency Certificate (TRC) and Form 10F.
3. When TDS is Deducted?
- At the earlierof:
- Creditto the payee’s account (even if in a “Suspense Account”).
- Actual payment(cash, cheque, or any other mode).
4. Exemptions
- No TDSif units are acquired by:
- Non-Resident Indians (NRIs)or Hindu Undivided Families (HUFs)
- Using funds from a Non-Resident (External) Account (NRE/NRO)or foreign remittance under FEMA, 1999.
5. Compliance Requirements
- PAN Mandatory: If the payee does not provide PAN, TDS is deducted at 20% or higher(as per Section 206AA).
- Form 15CA/CB: Required for foreign remittancesexceeding specified limits.
- TDS Return: Filed in Form 27Q(for non-resident payments).
6. Recent Changes (Budget 2023)
- DTAA Relief: From 1st April 2023, if a tax treaty provides a lower rate than 20%, TDS can be applied at the treaty rate(if TRC is furnished).
7. Practical Example
- Scenario: An Indian Mutual Fund pays ₹1 lakh dividend to John (US resident).
- Default TDS: ₹20,000 (20%).
- If US Treaty Rate is 15%: TDS reduces to ₹15,000 (if TRC is submitted).
8. Penalties for Non-Compliance
- Late Deduction: 1% interest per monthunder Section 201(1A).
- Late Payment: 5% interest per month.
- Non-Filing of TDS Returns: Penalty up to ₹1 lakhunder Section 271H.
