The Indian mutual fund market has undergone a major shift with the introduction of Section 194K under the Income Tax Act — a provision that mandates Tax Deducted at Source (TDS) on certain mutual fund earnings. For investors, understanding these rules isn’t just good practice; it’s critical to maximizing net returns and staying compliant with tax laws.
Section 194K deals specifically with TDS on dividend income from mutual funds. If your dividends exceed ₹5,000 in a financial year, a 10% TDS will be deducted before the money reaches your account. This change directly impacts take-home earnings and can influence how investors plan their portfolios.
Key Highlights
- Section 194K outlines the tax rules for dividend income from mutual funds in India.
- A 10% TDS applies to dividend payouts exceeding ₹5,000.
- Both domestic and foreign investors are affected.
- Capital gains from mutual funds are not subject to TDS.
- Knowing the rules helps investors optimize returns and avoid tax surprises.
What is TDS and Why It Matters in Mutual Funds
Tax Deducted at Source is a mechanism where tax is collected directly from income at the point of payment. In the case of mutual funds, the Asset Management Company (AMC) deducts the tax before distributing dividends. This ensures early tax collection and reduces the risk of evasion.
For investors, TDS affects the net income received and must be factored into investment decisions. Overlooking it could result in returns being lower than anticipated.
Understanding Section 194K
Introduced via the Finance Act 2021, Section 194K formalizes TDS on mutual fund dividends. The rule is straightforward:
- TDS rate: 10%
- Threshold: ₹5,000 per financial year
- Applicability: Dividends from all mutual fund schemes — equity, debt, or hybrid — for both domestic and foreign investors.
| Investor Type | TDS Rate | Threshold Limit |
|---|---|---|
| Domestic | 10% | ₹5,000 |
| Foreign | 10% | ₹5,000 |
Capital gains from selling mutual fund units are excluded from TDS under this section, but remain taxable as per capital gains tax rules.
Income Tax on Mutual Fund Earnings
Mutual fund income can come in two forms:
- Capital Gains: Profit from selling units.
- Short-term (less than 1 year for equity funds): 15% tax.
- Long-term (over 1 year): Tax-free up to ₹1 lakh; 10% thereafter.
- Dividends: Fully taxable at the investor’s applicable income tax slab rate. TDS under Section 194K applies to this income if above ₹5,000.
How to Calculate TDS on Mutual Fund Dividends
The formula is simple:
TDS Amount = Dividend Income × TDS Rate
Example:
- Dividend Income: ₹6,000
- TDS Rate: 10%
- TDS Deducted: ₹600
- Net Dividend Received: ₹5,400
Filing Taxes With TDS on Mutual Funds
Investors should collect and verify the following before filing:
- Form 26AS: Annual TDS statement linked to PAN.
- TDS Certificates: Provided by the AMC.
- Form 15G/15H: For individuals below the taxable limit to avoid TDS.
When filing your Income Tax Return (ITR), report dividend income and claim credit for TDS deducted. Excess deductions can be claimed as refunds.
Common Myths Around TDS on Mutual Funds
- Myth: TDS is an extra tax.
Fact: It’s an advance payment of your total tax liability. - Myth: TDS applies to all mutual fund income.
Fact: It applies only to dividends above the ₹5,000 threshold. - Myth: Refunds aren’t possible.
Fact: Excess TDS can be claimed back during tax filing.
Investment Strategies to Minimize TDS Impact
- Hold investments longer to benefit from capital gains tax exemptions.
- Choose growth options instead of dividend options to avoid frequent TDS deductions.
- Diversify between equity and debt funds to balance tax impact.
Bottom Line
Section 194K has changed how mutual fund dividends are taxed, making it essential for investors to track their earnings and TDS deductions. By staying informed, using the right investment strategy, and filing taxes accurately, investors can keep their returns optimized while staying compliant with the law.