| Section 194K of the Income-tax Act, 1961 outlines the rules regarding TDS on any income in respect of units of a mutual fund. It allows fund houses to deduct TDS at 10% if the annual amount of such income is more than ₹10,000 for resident investors. |
The Indian government abolished the Dividend Distribution Tax or DDT on mutual fund dividends back in 2020. But did this mean you could now receive MF income without taxes? Not really.
As per Section 194K of the Income-tax Act, 1961, fund houses now have to deduct TDS on the amount of such income before distributing it to investors. In this article, we discuss the meaning of TDS under Section 194K of the Income-tax Act, 1961, when the deductions happen, and what you should remember about TDS on MF.
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Table of Contents
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What is Section 194K of the Income-tax Act, 1961?
Section 194K of the Income-tax Act, 1961 mandates a TDS deduction on any income earned in respect of units of mutual funds specified under section 10(23D) of the Income-tax Act, 1961. The full form of TDS is Tax Deducted at Source, which means tax is deducted before the income reaches the recipient.
Here’s how TDS is deducted under this section:
- Deductor: The entity (fund house) distributing income in respect of units of mutual funds deducts the TDS if the amount of such income exceeds ₹10,000/ financial year.
- Timing: This TDS deduction can happen at the time of credit or payment, whichever is earlier.
- Who does it apply to: TDS deductions u/s 194K apply to resident Indians only.
The investor will receive such income minus the applicable TDS and can claim a TDS credit when filing ITR.
What is the TDS Rate Under Section 194K of the Income-tax Act, 1961?
Under Section 194K of the Income-tax Act, 1961, tax is withheld at the following rates:
- 10% if valid PAN details are available
- 20% if valid PAN details are not available
Where is TDS Applicable: Understanding Types of Income from Mutual Funds
Mutual fund investors may receive income or gains in different ways. For understanding tax deducted at source under Section 194K of the Income-tax Act, 1961, the key distinction is:
| Income Type | Tax Treatment |
| Dividend and income from units of mutual funds |
|
| Capital Gains |
|
How Does TDS Deduction Under Section 194K Work in Practice?
Now that you know what is TDS on mutual funds u/s 194K of the Income-tax Act, 1961, let’s see how it actually works:
- The mutual fund house collects TDS before making payment to investors of income earned by them in respect of units.
- This tax deducted at source is deposited with the IT department on monthly basis and reported using the TDS return Form 26Q.
- The fund house issues a TDS certificate (which is a proof of tax deduction and deposit)
TDS Deduction Example
Suppose you invest in an equity MF scheme and receive ₹15,000 as an income on units in a year. Here’s how Section 194K of the Income-tax Act, 1961 will apply:
| Particular | Amount |
| Covered income | ₹15,000 |
| Applicable annual threshold | ₹10,000 |
| TDS rate (when PAN details are available) | 10% |
| TDS deduction | ₹1,500 (10% of ₹15,000) |
| Balance after TDS deduction | ₹13,500 |
In this example, the covered income exceeds the ₹10,000 annual threshold. At a 10% TDS rate, the illustrative tax deducted at source would be ₹1,500. Therefore, you will receive the balance income amounting to ₹13,500.
Exceptions Under Section 194K of the Income-tax Act, 1961
TDS is not deducted under Section 194K of the Income-tax Act, 1961 in certain specific cases. Here’s when TDS may not be deducted u/s 194K of the Income-tax Act, 1961:
- If the annual income is up to ₹10,000 in a given financial year.
- If the income is a capital gain made by selling mutual fund units.
- If the income is paid to non-residents (Section 195 of the Income-tax Act, 1961 applies)
Things to Remember for TDS on Mutual Funds
Here are a few practical points investors should know about TDS on mutual fund income:
| What to Remember | What It Means for You |
| Threshold limit | From 1st April 2025, the TDS threshold has been increased from ₹5,000 to ₹10,000/year. |
| Check Form 26AS | Once the deducted TDS is deposited with the government and reported against your PAN, it should appear in Form 26AS. You can check this before filing your Income-tax Return (ITR). |
| TDS can be claimed as tax credit | Eligible TDS may be claimed as credit against your final tax liability while filing your ITR. If excess tax has been deducted, you may be able to claim a refund, subject to applicable tax rules. |
| No PAN may mean 20% TDS | If a valid PAN is not provided, TDS may be deducted at 20%. However, this may not happen for those MF folios where PAN details have been provided. |
| Section number changes from 1 April 2026 | Under the Income-tax Act, 2025, applicable from 1st April 2026, the provision corresponding to old Section 194K of the Income-tax Act, 1961 is covered under Section 393(1), Table Sl. No. 4(i). |
| Non-compliance can lead to consequences | Failure to deduct or deposit TDS on time may lead to interest, penalties, and other consequences under the applicable income-tax provisions. |
Looking to learn more about mutual fund taxation? Read more educational blogs on capital gains, tax-loss harvesting, and other tax-related concepts. |
Conclusion
Understanding TDS on mutual funds is pretty easy once you understand the rules under Section 194K of the Income-tax Act, 1961. To sum up, Section 194K of the Income-tax Act, 1961 mandates fund houses to collect TDS on MF income if the annual income is more than ₹10,000 for resident investors. The rate of TDS deduction is 10% if valid PAN is present and 20% if it isn’t.
But the good news is that you can claim this as a tax credit and adjust it against your overall tax liability. Just make sure it's correctly reflected in your Form 26AS before filing your ITR.
TDS Section 194K of the Income-tax Act, 1961 FAQs
What is the meaning of TDS?
TDS or tax deducted at source is the tax amount that’s deducted directly from the source of the income. Under TDS rules, the person/ company making the payment (deductor) makes a specific percentage of TDS deduction and deposits it with the government before paying the balance amount to the recipient (deductee).
What is the TDS rate under Section 194K of the Income-tax Act, 1961?
Under Section 194K of the Income-tax Act, 1961, TDS is deducted when annual income is over ₹10,000 at 10% if PAN details are available. The rate is 20% if PAN details are not available.
Who deducts TDS under Section 194K of the Income-tax Act, 1961?
TDS deductions are done by the AMC or fund house, crediting the balance income amount to the resident investors.
Is TDS applicable on mutual fund redemptions?
No. TDS deductions under Section 194K of the Income-tax Act, 1961 do not apply to mutual fund redemptions. MF redemptions for resident investors are subject to capital gains taxes (depending on holding period and type of fund).
Is it possible to claim the TDS u/s 194K of the Income-tax Act, 1961 as a tax credit?
Yes. If your total annual tax liability is less than the Tax deducted or if it falls below the minimum taxable limit, you can claim the TDS amount back.
What is the penalty for not depositing TDS under Section 194K of the Income-tax Act, 1961?
The following interest and fee apply if the deductor fails to deposit TDS u/s 194K of the Income-tax Act, 1961 on time:
- If the amount is not deducted: Interest of 1% per month or part of month
- If the deducted amount is not deposited: Interest of 1.5% per month or part of month
- If TDS is not deducted or paid: Penalty u/s 271C of the Income-tax Act, 1961 will apply, which will be equal to the TDS amount not withheld/paid.
Other than that, non-compliance can also lead to disallowance of expenses under Section 40(a)(ia) of the Income-tax Act, 1961.
Disclaimer
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