Section 194NF of the Income Tax Act

The Finance Act of 2021 introduced Section 194NF of the Income Tax Act of 1961, which became operative on April 1, 2021. The taxation of income given to unit holders by a business trust or investment fund is covered in this section. Additionally, in an attempt to discourage cash transactions and encourage digital payments, the Indian government added two significant sections to the Income Tax Act of 1961: Sections 194N and 194NF. Under these provisions, cash withdrawals and cash income distributions are subject to tax deduction at source (TDS). In this article, we will discuss Section 194NF of the Income Tax Act and its implications in detail.

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Table of content

What is Section 194NF of the Income Tax Act?

Section 194N and Cash Transactions

Implications of Section 194NF

HUFs and Individuals

Businesses

Funds and Trusts

Exceptions to Section 194NF

Conclusion

Most Asked Questions

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What is Section 194NF of the Income Tax Act?

Any revenue given to unit holders by a business trust or investment fund is subject to Section 194NF. The statement stipulates that the individual in charge of paying such income must deduct 10% tax at the time of payment. The trustee or management of the business trust or investment fund, or any other individual designated by the trustee or manager to make the payment, is referred to as the "person responsible for making the payment." Any revenue disbursed by the business trust or investment fund, whether in the form of interest, dividends, capital gains, or any other type of income, is included in the income mentioned in Section 194NF.

Section 194N and Cash Transactions

Section 194N is a regulation intended to limit significant cash withdrawals. It was first implemented in 2019 and is applicable to anyone who withdraws more than Rs. 1 crore in cash within a fiscal year from their bank, co-operative bank, or post office. The process is as follows: You would be required to pay TDS at a rate of 2% on any withdrawals exceeding Rs. 1 crore. For instance, TDS will be Rs. 1 lakh if you withdraw Rs. 1.5 crore in a year, which is 2% of the Rs. 50 lakh exceeds the ₹1 crore barrier. The bank or financial institution is in charge of deducting this TDS. Before releasing the money, they will collect it. But don't panic, you can claim this TDS as a credit on your tax return if you qualify.

Implications of Section 194NF

HUFs and Individuals

If your yearly cash withdrawals surpass ₹1 crore, you may be required to pay TDS under Section 194N as an individual or as a member of a Hindu Undivided Family (HUF). Additionally, you must account for TDS under Section 194NF if you receive cash income from a business or partnership, such as dividends or profits. The cash flow hit may still be painful even though you can claim the TDS as credit. In order to recover any excess TDS, you might also need to file your tax return.

Businesses

Businesses bear two burdens. Large cash withdrawals may require them to pay TDS under Section 194N, and if they distribute income in cash, they may also be required to deduct TDS under Section 194NF. Keeping track of documents, making deductions, depositing money, and submitting returns can all be considered operational burdens. However, the goal of these regulations is to promote a move towards digital transactions, which may eventually help companies.

Funds and Trusts

Trusts may have to deal with both areas, particularly if they give their contributors or beneficiaries financial income. For them, cash flow can become a serious problem, and TDS compliance could make it more difficult to accomplish their goals.

Exceptions to Section 194NF

The following are exempt from this section: 

• A Hindu Undivided Family (HUF) or resident individual receives income from a business trust or investment fund if the total income for the fiscal year does not exceed Rs. 5,000.

  
  

• Income given to anyone other than an individual or HUF by a business trust or investment fund, provided that the total amount of such income during a fiscal year does not exceed Rs. 1,000. 

  
  

• A business trust or investment fund may distribute income to any individual if it resembles a capital gain from the sale of a long-term capital asset.

  
  

• If the revenue is similar to interest earned or receivable from a Special Economic Zone (SEZ) developer or SEZ unit, it can be disbursed to any individual by a business trust or investment fund.

Conclusion

An essential clause in the Income Tax Act, Section 194NF, attempts to guarantee that income disbursed by an investment fund or business trust is appropriately taxed. To avoid fines or legal problems, trustees, managers, and authorised individuals should be aware of this clause and abide by its obligations.

FAQ

Q1. What is Section 194NF of the Income Tax Act, of 1961?

The Income Tax Act of 1961 contains a provision known as Section 194NF that addresses the taxation of income given to unit holders by a business trust or investment fund. According to this clause, the individual who is in charge of paying the unit holder must subtract 10% tax from the income that is disbursed.

Q2. When did Section 194NF come into effect?

Following its introduction by the Finance Act of 2021, Section 194NF became operative on April 1, 2021.

Q3. What is the tax deduction rate under Section 194NF?

In accordance with Section 194NF, 10% of the income given to the unit holder is taxed.

Q4. What is the difference between Section 194N and Section 194NF TDS?

If your yearly cash withdrawals surpass ₹1 crore, you may be required to pay TDS under Section 194N as an individual or as a member of a Hindu Undivided Family (HUF). Additionally, you must account for TDS under Section 194NF if you receive cash income from a business or partnership, such as dividends or profits.

Q5. Who is responsible for deducting tax under Section 194NF?

Tax deduction under Section 194NF is the responsibility of the management or trustee of the investment fund or business trust, or any other authorised individual who is in charge of paying the unit holder.

Q6. What types of income are covered under Section 194NF?

Section 194NF applies to all forms of income disbursed by a business trust or investment fund, including interest, dividends, capital gains, and other revenue.

Q7. Are there any exceptions to Section 194NF?

Yes, Section 194NF does have some exceptions. If the entire amount of income given to a resident individual or Hindu Undivided Family (HUF) in a fiscal year is less than Rs. 5,000, the clause does not apply. Similarly, if the total amount of income received by any individual or HUF during a fiscal year does not exceed Rs. 1,000, the section does not apply to that income.

Q8. What happens if the person making the payment fails to deduct tax under Section 194NF?

The person in charge of paying the unit holder may be subject to fines and interest under the Income Tax Act of 1961 if they neglect to deduct tax under Section 194NF or do so at a lesser rate than is recommended.

Q9. Is Section 194NF applicable to income like capital gains or interest received from a Special Economic Zone (SEZ) developer or SEZ unit?

No, income that resembles capital gains from the transfer of a long-term capital asset is exempt from Section 194NF. Additionally, it excludes income from Special Economic Zone (SEZ) developers or SEZ units, such as interest earned or receivables.