Section 194K of Income Tax Act – TDS on Mutual Fund Dividends

When you invest in mutual funds, you expect regular returns in the form of dividends or capital appreciation. While it can be a tax-efficient investment tool, certain tax rules still apply to the income you earn.

One such rule is governed by Section 194K of the Income Tax Act, which deals with Tax Deducted at Source (TDS) on mutual fund dividends. This section is important for all retail investors who receive dividend payouts from their mutual fund investments. 

Section 194K mandates that any income in the nature of dividends received from mutual fund units is subject to TDS, if it exceeds a certain limit. This section was reintroduced through the Finance Act, 2020, and became applicable from 1st April 2020. 

Here are the key points: 

• Applies only to dividend income paid by mutual funds to resident individuals and Hindu Undivided Families( HUFs)

• Capital gains from mutual funds are not subject to TDS under this section

• The mutual fund is responsible for deducting and depositing TDS with the government 

• TDS of 10% applies on dividends worth over ₹5,000 in a financial year (till FY 2024-25)

• If an investor fails to provide their PAN or Aadhaar details, TDS increases to 20%

The Union Budget 2025 introduced key changes affecting Section 194K: 

• The TDS threshold limit on mutual fund dividends has been increased from ₹5,000 to ₹10,000 per financial year 

• The revised threshold is applicable from 1st April 2025, aligning with the start of the new financial year FY 2025–26 

• The TDS rate remains unchanged at 10% 

   

The amendment provides relief to investors by ensuring that TDS is deducted only when dividend earnings cross a more substantial threshold. This could help improve cash flow and simplify tax compliance. 

As per the Income Tax Act and CBDT guidelines, the applicable rate is: 

• 10% TDS on the entire dividend amount if it exceeds ₹10,000 in a financial year

However,

• If PAN is not provided, TDS will be deducted at 20% as per Section 206AA

Example

Certain cases are exempt from TDS deduction under Section 194K: 

• Income up to ₹10,000 in a financial year is fully exempt from TDS under this section

• Capital gains from mutual fund units are not covered under Section 194K

• Certain eligible individuals can get TDS exemption by submitting Form 15G/15H

• Non-resident investors are subject to TDS under Section 195, not 194K

   

These exemptions help reduce the compliance burden on investors and clarify the scope of TDS applicability.

TDS deduction is managed by the AMC or the fund house, based on your PAN and income details. Mutual funds must follow certain rules when deducting TDS under Section 194K: 

• Deduct 10% TDS on dividend payments if they exceed ₹10,000 in a financial year

• Obtain and verify your PAN details to apply correct TDS rates

• Deduct TDS before crediting the dividend amount to your bank account

• Deposit deducted TDS with the government within the prescribed timelines

• Report TDS in your Form 26AS and issue TDS certificates (Form 16A)

Here’s what could happen if AMCs fail to comply with TDS regulations: 

• Interest on late deduction: 1% per month from the date when tax was deductible

• Interest on late deposit: 1.5% per month from deduction date till deposit

• Disallowance of Expenses: Under Section 40(a)(ia) if TDS is not deducted

• Penalty as per Section 271C: Equal to the amount not deducted or paid

• Prosecution under Section 276B: Could lead to imprisonment and fine in severe cases

   

These strict penalties emphasise the importance of timely and accurate TDS compliance by mutual funds. 

1. TDS Deduction on Mutual Fund Dividends

If you receive dividends from mutual funds above ₹10,000 in a year, TDS is automatically deducted. This potentially reduces the actual amount you receive.

 

2. Reporting Dividend Income in ITR

Dividend income, including the amount on which TDS is deducted, must be reported in the Income Tax Return (ITR). You can claim credit for TDS deducted against your total tax liability.

 

3. Steps to Claim TDS Refund

   If your total income is below the taxable limit or you have paid excess TDS, you can claim a refund by: 

   • Filing ITR accurately to report TDS on dividend earnings

   • Ensuring Form 26AS reflects the TDS deducted

   • Claiming refund for excess TDS while filing returns

1. Submit Form 15G/15H (If Eligible)

   • Individuals below 60 years can submit Form 15G

   • Senior citizens (60+) can use Form 15H

   • Applicable only if total income is below the basic exemption limit

2. Ensure PAN/Aadhaar is Linked

   • Always update your PAN with the AMC

   • Link PAN with Aadhaar to avoid 20% TDS under Section 206AA

3. Claim TDS Credit While Filing ITR

   • Use Form 26AS and AIS to verify TDS deducted

   • Claim the amount in Schedule TDS of your ITR

   • Ensure dividend income is accurately declared

The following table clarifies the differences in the TDS rules under Section 194K and Section 195: