Section 194K TDS on Mutual Funds

Section 194K of the Income-tax Act, 1961, sets the rules for Tax Deducted at Source (TDS) on income from mutual fund units paid to resident investors. This provision requires entities like mutual fund houses or asset management companies (AMCs) to withhold tax on dividend income from mutual funds when it exceeds a specified annual limit before making the payout to the investor. The aim is to collect tax at the source itself, reducing the burden of tax compliance and avoidance later. Section 194K came into force with changes brought by the Finance Act, 2020, after the abolition of Dividend Distribution Tax (DDT), making dividend income taxable in the hands of the investor and subject to TDS.

What Section 194K covers

Section 194K governs TDS deduction on mutual fund dividend income paid to resident investors in India. It applies when dividends from mutual funds or other specified unit-based investments are credited or paid to the investor and cross a certain threshold in a financial year. The payer (for example, the AMC) is responsible for deducting and depositing this tax before making the payment.

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When TDS is applicable

Under Section 194K:

• TDS is deducted on dividend income received from mutual funds.
• Capital gains on sale or redemption of mutual fund units are not subject to TDS under this section.

Threshold Limit

• TDS is deducted only if the total dividend income from mutual funds paid or credited in a financial year exceeds ₹5,000 for a resident investor.
• From FY 2025-26 onwards, the threshold limit has been increased to ₹10,000 per financial year before TDS applies.

This means if an investor receives dividends totaling less than ₹10,000 (after the latest changes), no TDS is deducted on such income.

TDS Rates and PAN impact

Standard TDS rate:

• 10% on dividend income above the threshold when the investor has a valid PAN.
• If the PAN is not provided, TDS is deducted at 20% (under Section 206AA) to discourage undisclosed tax information.

Who deducts and deposits TDS

The responsibility to deduct TDS under Section 194K lies with:

• Mutual Fund Houses (AMCs)
• Registrar & Transfer Agents (RTAs) acting on behalf of mutual funds
• Any other entity paying dividend income on mutual fund units.

TDS is deducted before or at the time of credit of dividend income to the investor’s account, whichever is earlier.

How TDS works in practice

1. A mutual fund declares a dividend for a unit holder.
2. If the total dividends in the financial year exceed ₹10,000 (new limit), the AMC calculates 10% TDS on the dividend amount.
3. TDS is deducted before paying the investor.
4. AMC deposits the deducted tax with the government.
5. The investor receives a TDS certificate (Form 16A) as proof of tax deducted.
6. TDS is shown in the investor’s Form 26AS, which can be used when filing an income tax return.

How it affects your tax return

Dividend income after TDS must be reported under Income from Other Sources in the income tax return (ITR). The TDS deducted can be claimed as a tax credit against the total tax liability when filing the return. If total income is below the taxable limit or excess tax is deducted, a refund can be claimed from the Income Tax Department.

Exemptions and Special Cases

No TDS under Section 194K is required when:

• The investor’s total dividend income in the year does not exceed the threshold limit (₹10,000 for FY 2025-26).
• Investors submit Form 15G/15H (if eligible and total income is below the taxable limit).
• Specific exempt entities (like pension funds or government organisations) have valid declarations submitted to the AMC.
• For Non-Resident Indians (NRIs), TDS is generally covered under Section 195, not Section 194K.

Penalties and Compliance

If the payer (AMC or responsible entity) fails to deduct or deposit TDS as required:

• Interest may be charged on the tax amount not deducted or not deposited.
• Penalties may apply under relevant sections of the Income-tax Act for non-compliance.
• Disallowance of expenses may occur under Section 40(a)(ia) if TDS is not deducted when required.

Example

Suppose an investor receives ₹12,000 in dividends from a mutual fund in a financial year:

• Because annual dividends > ₹10,000, the AMC must deduct 10% TDS.
• TDS = ₹1,200 (if PAN is provided).
• The investor receives ₹10,800 after tax.
• TDS deposited appears in Form 26AS, and the investor reports this income and credit while filing ITR.

Conclusion

Section 194K ensures that income tax on mutual fund dividends is collected efficiently at the time of distribution. With the threshold limit updated to ₹10,000 per financial year and a standard 10% TDS rate (20% without PAN), investors must ensure accurate dividend tracking and PAN details are submitted to mutual fund houses. It’s important to report dividend income and claim TDS credit when filing your tax return. Understanding Section 194K helps mutual fund investors remain compliant and avoid surprises during tax season.