Section 194K TDS on Mutual Fund Income: 2026 Guide
Section 194K TDS applies to income distributions (IDCW) from mutual funds—not capital gains on redemption. If you received mutual fund dividends in FY 2025-26 totaling Rs 5,000+, your fund deducted 10% TDS. You must claim this TDS credit in your ITR for AY 2026-27.
When mutual funds distribute income (dividends, interest) to you, the fund deducts 10% TDS under Section 194K if your total dividend from that fund exceeds Rs 5,000 in a financial year. Many mutual fund investors are unaware of this TDS or forget to claim the credit in their ITR, missing tax refunds.
This guide covers Section 194K in detail: who deducts, what the rate is, the Rs 5,000 threshold, how to avoid TDS (Form 15G/15H), and how to claim TDS credit in ITR for AY 2026-27.
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What Is Section 194K? Background
Section 194K was introduced by Finance Act 2020 (effective April 1, 2020) to shift tax collection on mutual fund dividends from the fund level to the investor level.
Before Finance Act 2020: Mutual funds paid Dividend Distribution Tax (DDT) at 20% (approximately). Investors received dividends tax-free.
After Finance Act 2020: DDT abolished. Mutual funds now deduct TDS under Section 194K at 10% on distributions exceeding Rs 5,000. Investors report dividend income in their ITR and claim TDS credit.
Key change: Tax collection moved from fund to investor; investors now pay tax at their marginal slab rate (0% to 42.84% including cess) instead of fixed 20% DDT.
Who Deducts TDS: The Mutual Fund (AMC)
Deducting entity: The Asset Management Company (AMC) or the fund distributor deducts TDS before releasing dividend payments.
Timing: TDS deducted on the payment date of the dividend, usually monthly or quarterly depending on the fund's dividend payout schedule.
What funds are covered:
- Equity mutual funds (dividend option / IDCW)
- Debt mutual funds (dividend option / IDCW)
- Liquid funds (dividend option)
- Balanced funds (dividend option)
- All other fund categories that declare dividends
Not covered:
- Growth option (no dividend declared, TDS does not apply)
- Direct plans issued post-2013 (different taxation, though same TDS rule applies)
The Rs 5,000 Threshold (Most Important Rule)
Threshold: Rs 5,000 per mutual fund, per financial year.
Application:
- If total dividend from a single fund (e.g., Axis Bluechip Fund) exceeds Rs 5,000 in FY, TDS applies.
- TDS applies to ENTIRE dividend from that fund, not just the amount exceeding Rs 5,000.
- Per-fund, not aggregate: If you receive Rs 4,999 from Fund A and Rs 4,999 from Fund B, no TDS. But Rs 5,000 from Fund A triggers TDS on the full Rs 5,000 from Fund A.
Example:
- Fund A IDCW: Rs 6,000 (TDS on full Rs 6,000 = 10% = Rs 600)
- Fund B IDCW: Rs 4,500 (no TDS)
- Fund C IDCW: Rs 3,000 (no TDS)
- Total TDS deducted: Rs 600 (only on Fund A)
TDS Rate: 10% for Residents
Resident individuals: 10% TDS on IDCW exceeding Rs 5,000
NRI investors: TDS under Section 196A (20% TDS) applies, not 194K. Different rule for non-residents.
HUF: 10% TDS applies (treated like individual for TDS purposes)
Corporations: 10% TDS applies (Section 194K covers all entities, not just individuals)
No surcharge on TDS: The 10% is the base rate. Mutual fund does not add surcharge. Surcharge is applied later when you file ITR and pay balance tax.
IDCW vs Growth Option (Critical Distinction)
IDCW (Income Distribution cum Capital Withdrawal):
- Fund distributes income to you periodically (monthly/quarterly)
- TDS deducted per Section 194K if threshold crossed
- You report dividend income in ITR
- Earlier called "dividend option"; renamed IDCW from April 2021 by AMFI
Growth option:
- No distribution; income reinvested in fund
- TDS does NOT apply (no cash outflow)
- Capital gains occur only when you redeem
Tax implication: Growth option is typically more tax-efficient for investors in high tax brackets (no TDS). IDCW provides cash payouts but triggers TDS.
How to Avoid TDS: Form 15G and 15H
If your estimated total income is below taxable limit, you can claim exemption from TDS by submitting Form 15G (individual) or Form 15H (senior citizen) to the fund before dividend payout.
Steps:
- Download Form 15G from the mutual fund's website or CAMS/KFintech portal
- Fill in your PAN, name, estimated total income for the year, declaration of no tax liability
- Submit to the fund's investor relations email or upload on their portal
- Fund will NOT deduct TDS if Form 15G is verified
Condition: You must actually be below taxable income for the year. If you claim Form 15G but your actual income exceeds taxable limit, AO can deny Form 15G validity and impose penalty.
Who can claim:
- Salaried individual with income below Rs 2.5 lakh
- Retiree with pension below Rs 2.5 lakh
- Student with scholarship below Rs 2.5 lakh
- Anyone whose estimated total income is below taxable limit
How TDS Credit Reflects in Your ITR
Step 1: Find TDS amount
Mutual fund sends TDS certificate (Form 16A) annually or via portal showing amount deducted per fund. Also reflects in your CAS (Consolidated Account Statement) available on CAMS/KFintech.
Step 2: Verify in AIS/Form 26AS
Log into e-filing portal, check Form 26AS / Annual Information Statement (AIS). Should show TDS deducted by each fund.
Step 3: File ITR with Schedule OS
In ITR, go to Schedule OS (Other Source Income):
- List each mutual fund dividend received
- Total dividend amount
- Total TDS deducted (will auto-populate from AIS if matched)
Step 4: Claim TDS Credit in Schedule TDS
In ITR Schedule TDS2, the TDS deducted appears automatically (if matched). You claim credit = TDS amount deducted.
Step 5: Calculate refund
If TDS deducted > tax liability, you get a refund. If TDS < tax liability, you owe balance tax.
Example:
- Total mutual fund dividend: Rs 50,000
- TDS deducted: Rs 5,000
- Tax on dividend at 30% slab: Rs 15,000
- TDS credit: Rs 5,000
- Balance tax owed: Rs 10,000
Dividend Stripping Rule: Section 94(7)
Critical rule (often missed): If you buy mutual fund units 3 months before the record date for dividend and sell within 9 months after record date at a loss, that loss cannot be set off against dividend income (Section 94(7)).
Example:
- Buy 100 units of Fund at Rs 150 each (cost Rs 15,000) on March 15
- Record date for dividend: April 15
- Sell units after dividend on June 15 at Rs 140 each (loss Rs 1,000)
- Dividend received: Rs 2,000
- Loss of Rs 1,000 cannot be set off against the Rs 2,000 dividend (because of dividend stripping rule)
This rule prevents investors from harvesting losses while capturing dividends.
NRI vs Resident TDS Rates
Residents: 10% TDS under Section 194K
NRI: 20% TDS under Section 196A (higher rate applies to NRIs)
Impact: NRI investors face 2x the TDS rate. If NRI receives Rs 50,000 dividend:
- Resident TDS: Rs 5,000 (10%)
- NRI TDS: Rs 10,000 (20%)
NRI must file ITR in India, report dividend, claim Form 67 credit if foreign tax paid, though typically no foreign tax is deducted (fund is in India).
Practical Tips: Managing Mutual Fund TDS
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Track your dividends: Keep CAS (CAM Statement) updated; it shows all TDS deducted per fund.
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File Form 15G early: If eligible, submit to fund by June to avoid TDS for the remaining FY.
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Monitor Form 26AS: After June, check Form 26AS to see if TDS is reflecting. Discrepancies must be reported to fund.
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Reconcile before ITR: Match dividend shown in CAS with ITR disclosure. Many mismatch because TDS is shown in one year but dividend received in another (timing issue).
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Claim credit in ITR: Do not forget to claim TDS credit in Schedule TDS2. Missing this means paying double tax on dividends.
Key Takeaways for Action
- 10% TDS applies on mutual fund dividends exceeding Rs 5,000 per fund per FY.
- Form 15G exempts TDS if estimated income is below taxable limit.
- Report dividends in Schedule OS of ITR.
- Claim TDS credit in Schedule TDS2 to reduce final tax.
- Match CAS with Form 26AS before filing ITR for discrepancies.
Frequently Asked Questions
My mutual fund IDCW was Rs 4,900 this year. No TDS was deducted. Correct?
Yes. The Rs 5,000 threshold is per fund per FY. If your total IDCW from that fund is below Rs 5,000, no TDS applies. TDS triggers only when threshold is crossed.
I received Rs 10,000 dividend from Fund A. TDS deducted was Rs 800. Should it be Rs 1,000?
TDS should be 10% of Rs 10,000 = Rs 1,000. If only Rs 800 was deducted, verify with your fund if Form 15G was mistakenly applied or if there was a rebate. Contact the fund's support to confirm.
Growth option mutual funds do not have TDS, right?
Correct. Growth option does not declare dividends, so TDS does not apply. You only pay capital gains tax when you redeem (long-term: 20% with indexation; short-term: slab rate).
My fund showed TDS of Rs 5,000 but my income is below taxable limit. Can I get the TDS refunded?
Yes, if your actual total income is below taxable limit, you can file ITR claiming TDS credit. The entire TDS amount is refunded since your tax liability is zero. Submit with proof of low income.
I forgot to file Form 15G before receiving dividend. TDS was deducted. What now?
TDS is deducted and cannot be undone. You must file ITR claiming TDS credit. When you file ITR showing low income, you get the TDS amount refunded.
Section 194K, Income Tax Act 1961 (Finance Act 2020); Section 94(7) dividend stripping; Section 196A (NRI TDS); CBDT Circular on 194K; AMFI guidelines on IDCW/dividend option (April 2021 rename); CAS statement format, CAMS/KFintech.