When mutual funds distribute income (dividends, interest) to you, the fund deducts 10% TDS under Section 194K if your total income from that mutual fund exceeds Rs 10,000 in a financial year (Rs 5,000 up to FY 2024-25). 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 10,000 threshold, how to avoid TDS (Form 15G/15H), and how to claim TDS credit in ITR for AY 2026-27.
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 tax on distributed income under Section 115R at the fund level (the rate depended on the fund type). Investors received dividends tax-free.
After Finance Act 2020: DDT abolished. Mutual funds now deduct TDS under Section 194K at 10% where distributions to an investor cross the threshold (Rs 5,000 until FY 2024-25, Rs 10,000 from 1 April 2025 under the Finance Act 2025). 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 own slab rate (up to 35.88% including the 15% maximum surcharge on dividend income and 4% cess) instead of the fund paying tax.
Who Deducts TDS: The Mutual Fund (AMC)
Deducting entity: The mutual fund (acting through its AMC and registrar, such as CAMS or KFintech) deducts TDS before releasing the payout. Distributors do not deduct TDS.
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 income distributed, so TDS does not apply)
- Capital gains on redemption of units by resident investors
The Rs 10,000 Threshold (Most Important Rule)
Threshold: TDS applies only if the income paid to you by a mutual fund during the financial year exceeds Rs 10,000 (from 1 April 2025; it was Rs 5,000 up to FY 2024-25).
Application:
- The limit is tested per mutual fund (the fund house as payer), adding up IDCW from all its schemes in your folios. It is not tested scheme by scheme.
- Once the total crosses Rs 10,000, TDS applies to the entire amount paid by that mutual fund, not just the excess.
- Separate fund houses are tested separately: Rs 9,000 from Mutual Fund A and Rs 9,000 from Mutual Fund B means no TDS from either. Exactly Rs 10,000 from one fund house is also below the trigger, because the amount must exceed Rs 10,000.
Example (FY 2025-26):
- Mutual Fund A, two IDCW schemes: Rs 7,000 + Rs 5,000 = Rs 12,000 (TDS 10% on Rs 12,000 = Rs 1,200)
- Mutual Fund B: Rs 8,500 (no TDS)
- Mutual Fund C: Rs 3,000 (no TDS)
- Total TDS deducted: Rs 1,200 (only by Mutual Fund A)
TDS Rate: 10% for Residents
Resident individuals: 10% TDS once IDCW from a mutual fund exceeds Rs 10,000 in the year (20% if PAN is not furnished)
NRI investors: TDS under Section 196A (20% plus surcharge and cess, no threshold) applies, not 194K.
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 under a SEBI circular
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 the tax on your estimated total income for the year is nil, you can ask the fund not to deduct TDS by submitting Form 15G (individual below 60) or Form 15H (senior citizen, 60 or above) before the payout. From tax year 2026-27, both are replaced by Form 121.
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:
- Form 15G: resident individual below 60 whose estimated tax for the year is nil and whose total income does not exceed the basic exemption limit (Rs 4 lakh under the new regime, Rs 2.5 lakh under the old regime)
- Form 15H: resident individual aged 60 or above whose estimated tax for the year is nil (after rebate and deductions)
How TDS Credit Reflects in Your ITR
Step 1: Find TDS amount
The mutual fund issues a quarterly TDS certificate (Form 16A for FY 2025-26; Form 131 from tax year 2026-27) showing the amount deducted. 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 is more than your tax liability, you get a refund. If it is less, you owe the balance tax.
Example:
- Total mutual fund dividend: Rs 50,000
- TDS deducted: Rs 5,000
- Tax on dividend at 30% slab plus 4% cess: Rs 15,600
- TDS credit: Rs 5,000
- Balance tax owed: Rs 10,600
Dividend Stripping Rule: Section 94(7)
Critical rule (often missed): If you buy mutual fund units within 3 months before the record date and sell them within 9 months after the record date at a loss, the loss is ignored to the extent of the dividend received (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
- The Rs 1,000 loss is ignored entirely, because it does not exceed the Rs 2,000 dividend. You pay tax on the full Rs 2,000 dividend and cannot claim the loss anywhere.
This rule prevents investors from harvesting losses while capturing dividends.
NRI vs Resident TDS Rates
Residents: 10% TDS under Section 194K
NRI: 20% TDS (plus surcharge and cess) under Section 196A, with no threshold
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%) plus surcharge and cess
The NRI reports the dividend in an Indian ITR and claims the TDS credit. An NRI resident in a treaty country can claim the lower treaty rate by giving the fund a Tax Residency Certificate and Form 10F. Form 67 is for residents claiming credit for foreign tax, so it does not apply here.
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/15H early: If eligible, submit it at the start of the financial year, before the first payout.
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Monitor Form 26AS: Each quarter, 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 once IDCW from a mutual fund exceeds Rs 10,000 in a financial year (from FY 2025-26).
- Form 15G/15H stops TDS if your estimated tax for the year is nil.
- 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.
Section 194K, Income Tax Act 1961 (Finance Act 2020; threshold raised to Rs 10,000 by Finance Act 2025, Memorandum clause 61); Section 94(7) dividend stripping; Section 196A (NRI TDS); CBDT Circular on 194K; SEBI circular on IDCW naming (effective April 2021); CAS statement format, CAMS/KFintech.
