BAJAJ BROKING
July 07, 2025
4 mins read
If you invest in mutual funds, you need to understand how Section 194K impacts your income. This section outlines the tax deduction at source (TDS) rules applicable to income you receive from mutual fund investments. Whether you are a resident investor receiving dividends or redeeming units, the provisions of Section 194K may apply. Knowing when and how tax is deducted helps you plan your returns better and avoid confusion during income tax return filing.
Section 194K of the Income Tax Act mandates TDS on income earned from mutual fund units. Introduced in the Finance Act, 2020, this section requires any person making payment of income from mutual fund units to deduct tax at source if the income exceeds a specified limit. As an investor, this means if you earn dividend income from mutual fund holdings above ₹5,000 in a financial year, TDS will be deducted before the payment is made to you. It applies only to resident investors and does not include capital gains from the sale of mutual fund units.
Section 194K was introduced to streamline the taxation process and bring consistency in the treatment of mutual fund income. Prior to this section, mutual fund dividends were tax-free in your hands, and the mutual fund houses paid a Dividend Distribution Tax (DDT) on your behalf. However, with the abolition of DDT, dividend income became taxable in your hands. To ensure tax collection at the source and prevent revenue loss, Section 194K was introduced.
For you, this means the tax liability has shifted from the mutual fund house to you as an investor. TDS now acts as an advance tax mechanism. It also simplifies tax reporting by automatically reflecting in your Form 26AS. While the amount deducted is not final tax, you can adjust it when computing your total tax liability or claim it as a tax credit during income tax return filing.
Before you assume Section 194K applies to every payout, consider these points. This will help you determine whether TDS should be deducted on your mutual fund income.
TDS is deducted only if you are a resident in India. Non-residents are governed by Section 195 instead.
TDS under Section 194K is deducted only from dividends, not from capital gains arising out of sale or redemption.
If your total dividend income from mutual funds does not exceed ₹5,000 in a financial year, TDS is not applicable.
This includes both equity-oriented and debt-oriented mutual fund units held by you.
Understanding the rate and exemption limit helps you manage your mutual fund payouts better. If you are receiving income from mutual fund investments, Section 194K applies as follows:
The rate of TDS is 10% on dividend income exceeding ₹5,000 in a financial year. This threshold is considered across all mutual fund schemes held with a particular fund house. If your total dividend from a fund house crosses ₹5,000, then TDS is deducted on the entire amount, not just the portion above ₹5,000.
If you do not provide your PAN, the rate of TDS increases to 20%. Therefore, you must ensure that your PAN is updated with your fund house to avoid excess deductions.
Also, TDS is not deducted on capital gains. If you redeem or switch mutual fund units and make a profit, no TDS is deducted under this section. However, you are still required to report capital gains during income tax return filing.
Here is a breakdown of the income types from mutual funds and how they are treated under Section 194K:
Income Type | TDS Applicable under Section 194K | Tax Treatment |
Dividend from equity mutual funds | Yes (if above ₹5,000) | Taxable as per slab |
Dividend from debt mutual funds | Yes (if above ₹5,000) | Taxable as per slab |
Short-term capital gains (Equity) | No | Taxed at 15% |
Long-term capital gains (Equity) | No | 10% on gains exceeding ₹1 lakh |
Short-term capital gains (Debt) | No | Added to income, taxed as per slab |
Long-term capital gains (Debt) | No | 20% with indexation |
Income below ₹5,000 from any scheme | No | Not subject to TDS |
Capital gains on redemption/switch | No | Must be declared by investor |
Some exceptions may apply depending on your situation. Here are key exemptions you should know about:
If your dividend income from a single fund house is less than ₹5,000 in a financial year, no TDS is deducted.
Any profit earned from selling or switching mutual fund units is not subject to TDS under this section.
If you are a non-resident, Section 194K does not apply to you. Instead, tax is deducted under Section 195 at applicable rates.
In cases where PAN is not available, higher TDS at 20% is deducted—so ensure your PAN is linked to avoid unnecessary deductions.
Unlike some other sections, declarations such as Form 15G or 15H are not valid to avoid TDS under Section 194K.
Before Section 194K came into effect, mutual fund dividends were tax-free in your hands. The fund house paid Dividend Distribution Tax (DDT), and you received the net dividend without any TDS.
Mutual fund houses paid DDT before distributing dividends, and you did not have to include this income in your tax return.
There was no TDS deduction from your end or by the fund house, so tracking tax liability was not required at your level.
You had to report capital gains independently based on type and holding period.
You had fewer reporting responsibilities compared to the present TDS-based structure.
Failure to comply with Section 194K may lead to interest charges and penalties. These could affect both the fund house and you, depending on the nature of default.
If TDS is not deducted on time, interest at 1% per month (or part thereof) applies from the date it was deductible to the actual date of deduction.
If the deducted TDS is not deposited on time, interest at 1.5% per month applies from the date of deduction to the date of deposit.
Even if you file your return later and adjust the deducted amount, interest on delay must still be paid by the responsible party.
Failure to file Form 26Q for TDS returns can result in a late fee of ₹200 per day under Section 234E.
If you earn dividend income from mutual funds, Section 194K affects how you receive it. It ensures tax compliance by deducting TDS at source, provided the income crosses ₹5,000. While capital gains are excluded, you should still report them during your income tax return filing. Being aware of TDS thresholds, PAN requirements, and interest liabilities helps you avoid surprises. Keep your PAN updated, monitor your mutual fund income, and reconcile with Form 26AS to ensure smooth filing and proper credit.
Disclaimer: This article is for general informational purposes only. Please consult a qualified tax professional for personalised advice related to taxation.
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TDS is deducted at 10% on dividend income if your total dividend from a fund house exceeds ₹5,000 in a financial year. Without PAN, the rate is 20%.
If your total dividend income from a single mutual fund house does not exceed ₹5,000 in a financial year, no TDS will be deducted under Section 194K.
The asset management company (AMC) or mutual fund house is responsible for deducting TDS before paying the dividend to you.
No. Section 194K only applies to dividend income. Capital gains—whether short-term or long-term—are not subject to TDS under this section.
Yes. If your dividend income is below ₹5,000 or you are a non-resident, TDS is not deducted under Section 194K. Capital gains are also exempt from this section.
Yes. You can claim the TDS amount shown in your Form 26AS as a tax credit while filing your income tax return, which adjusts against your final tax liability.
Section 194K is levied when mutual fund dividend income is paid or credited to your account and exceeds the ₹5,000 threshold during the financial year.
No. Non-resident investors fall under the scope of Section 195. Section 194K is applicable only if you are a resident individual.
Yes. If your total tax liability is less than the TDS deducted, or if you fall under the exemption limit, you can claim a refund when filing your income tax return.
Interest for late deduction is 1% per month, and for late deposit is 1.5% per month. These apply until the amount is deducted and deposited respectively.
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