Section 194K Explained: TDS on Mutual Fund Dividends (2025-26)
- Rashmita Choudhary
- Jul 25
- 12 min read
Understanding the tax on mutual fund income is vital for every investor. The introduction of Section 194K changed how mutual fund dividend tax works, shifting the responsibility to investors after the Dividend Distribution Tax (DDT) was abolished. This article explains Section 194K, including what it is, its TDS rates, the important threshold limits, how it affects investors, and the latest updates for the financial year 2025-26. This knowledge helps you manage your investments and adhere to current income tax laws.
Table of content
What is Section 194K of the Income Tax Act, 1961?
Section 194K of the Income Tax Act is a rule that requires the deduction of tax at source (TDS) on income paid to residents from mutual fund units. The Finance Act, 2020, introduced this section, making it effective from April 1, 2020. Its main purpose was to tax dividends from mutual funds directly in the hands of the investors. This change happened after the government abolished the Dividend Distribution Tax (DDT), which was previously paid by the mutual fund companies themselves.
This section targets income payable to a resident from:
Units of a Mutual Fund specified under Section 10(23D).
Units from the administrator of a specified undertaking.
Units from a specified company.
The introduction of Section 194K simplified the tax system by removing the double taxation that existed before. Now, fund houses must deduct Tax Deducted at Source (TDS) before paying out dividend income to unitholders, ensuring better tax compliance under the Income Tax Act, 1961.
Key Objectives of Introducing Section 194K
The government introduced Section 194K with several clear goals in mind, primarily driven by the Budget 2020 reforms. These objectives aimed to create a more transparent and equitable tax structure for mutual fund investors.
The main purposes were:
Abolish Dividend Distribution Tax (DDT): The primary reason was to end the DDT system, where companies paid the tax on dividends before distributing them. This shifted the tax liability directly to the investors, making them responsible for paying tax on the income they earn.
Create a TDS Framework for Dividends: With DDT gone, a new mechanism was needed to ensure tax was collected on mutual fund dividends. Section 194K brought this income into the TDS net, making the process more streamlined.
Simplify the Tax Mechanism: The new rule simplifies the taxation process. Instead of a complex system where the tax was paid by the distributor, it is now a straightforward deduction from the investor's income at their applicable slab rate.
Improve Tax Compliance: By deducting tax at the source, the government can ensure better tax compliance and prevent any loss of revenue from this income source.
Applicability of TDS under Section 194K
Understanding who deducts the tax and on what income is crucial. Section 194K applies to specific parties and types of income, ensuring that tax is collected efficiently.
The rules of Section 194K clearly define the deductor, the deductee, and the nature of the income that falls under its purview. The section does not apply to all types of mutual fund earnings, making the distinction very important for investors. It specifically excludes capital gains from the redemption or sale of mutual fund units, which are taxed separately.
Aspect | Details |
Who Deducts? | Asset Management Companies (AMCs) or fund houses responsible for paying the income. |
Who is it for? | Resident unitholders who receive income from their mutual fund investments. |
What Income? | Dividend income from units of a Mutual Fund (under Sec 10(23D)), units from an Administrator of a specified undertaking, or units from a specified company. This also includes dividend reinvestment plans. |
Not Applicable? | It does not apply to capital gains. Payments to Non-Residents are also excluded, as they are covered by Section 195. |
The terms "Administrator" and "specified undertaking" refer to the structure established by the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002.
TDS Rate and Threshold Limit under Section 194K
The TDS rate and threshold limit under Section 194K are key details for any mutual fund investor. A significant change to the threshold limit was announced in Budget 2025, which investors need to be aware of.
Current Threshold Limit (Up to FY 2024-25 / AY 2025-26)
For the financial year ending March 31, 2025, the Section 194K threshold limit is Rs. 5,000. If the total dividend income from a single mutual fund house to an investor exceeds this amount in a financial year, TDS is deducted on the entire amount.
New Proposed Threshold Limit (From FY 2025-26 / AY 2026-27)
Starting from the financial year 2025-26, which begins on April 1, 2025, the threshold limit under Section 194K is set to increase. As proposed in the Finance Bill 2025, the new limit will be Rs. 10,000. This change will provide some relief to small investors, as TDS will only apply if their dividend income crosses this higher amount.
Applicable TDS Rates
The TDS rates depend on whether the investor has provided their Permanent Account Number (PAN).
Condition | TDS Rate |
PAN Provided | 10% |
PAN Not Provided | 20% |
Income <= Threshold | Nil |
It's important for investors to ensure their Permanent Account Number (PAN) is updated with the fund house to avoid the higher 20% TDS rate. For Non-Resident Indians (NRIs), these rules do not apply; instead, TDS is deducted under Section 195.
When is TDS under Section 194K Deducted?
The timing of TDS deduction under Section 194K is clearly defined to ensure there are no ambiguities. The rule is based on the principle of "whichever is earlier" to prevent any delays in tax collection.
TDS must be deducted at the moment when one of the following events occurs first:
The credit of the income to the investor's account, even if it is a suspense account.
The actual payment of the income through any method, such as cash, cheque, draft, or electronic transfer.
This ensures that the tax is deducted promptly, either when the income is formally recorded or when it is paid out.
Exceptions to TDS Deduction under Section 194K
There are specific situations where the rules of Section 194K do not apply. These exceptions are important for investors to know so they can determine if TDS will be deducted from their income.
TDS under Section 194K is not applicable in the following cases:
Income Below Threshold: If the total dividend income in a financial year from a fund house does not go over the specified limit (currently Rs. 5,000, proposed to be Rs. 10,000 from FY 2025-26), no tax is deducted.
Capital Gains: The section does not cover income from capital gains, which arise when you sell or redeem your mutual fund units. Capital gains are taxed under different provisions.
Payments to Non-Residents: Section 194K is only for residents. Non-Resident Indians (NRIs) are covered under Section 195 of the Income Tax Act.
Submission of Form 15G/15H: If an investor's total income is below the taxable limit, they can submit Form 15G and Form 15H to the fund house. Form 15G is for individuals under 60 years, while Form 15H is for senior citizens (60 years and above). By submitting Form 15G/15H, you declare that no tax should be deducted from your income.
Understanding Section 194K vs. Capital Gains on Mutual Funds
A common point of confusion for investors is the difference between dividend income and capital gains. Section 194K only applies to one of these, and understanding the distinction is essential for proper tax planning.
Here is a simple comparison to clarify the difference:
Dividend Income:
This is the profit shared by a mutual fund company with its unitholders.
TDS is deducted under Section 194K if the income exceeds the threshold.
This income is then taxed under the head "Income from Other Sources" in the investor's tax return.
Capital Gains:
This is the profit you make from selling or redeeming your mutual fund units.
No TDS is deducted for resident investors under Section 194K.
This income is taxed separately under the head "Capital Gains," and the rate depends on whether it is a Short-Term Capital Gain (STCG) or a Long-Term Capital Gain (LTCG). The taxation of capital gains from mutual funds follows different rules.
Compliance for Deductors (AMCs/Fund Houses)
Asset Management Companies (AMCs) and fund houses, as the deductors, have specific responsibilities under Section 194K. They must follow a strict compliance process to ensure that tax is deducted and deposited correctly.
The compliance duties for deductors include:
Deducting TDS at the correct rate (10% with PAN, 20% without PAN) when the dividend payment exceeds the threshold.
Depositing the deducted TDS with the government by the due date, which is typically the 7th of the following month.
Filing quarterly TDS returns using Form 26Q to report all the deductions made during that quarter.
Issuing a TDS certificate (Form 16A) to the investor, which shows the amount of tax deducted. Investors can download these certificates and view their tax credits on the TRACES portal.
What Should Investors Do?
Investors whose mutual fund dividends might be subject to Section 194K can take several steps to manage their taxes effectively and ensure compliance. Taking proactive measures can help avoid higher tax deductions and make the tax-filing process smoother.
Ensure PAN is Correctly Updated
Investors should verify that their PAN is correctly linked with the AMC or registrar. An incorrect or missing PAN will lead to a higher TDS deduction of 20% instead of the standard 10%.
Monitor Dividend Income
It is wise to track dividend income received from each fund house during the financial year. This helps anticipate if the income is approaching the threshold limit, preparing you for a potential TDS deduction.
Submit Form 15G/15H if Eligible
If your total estimated tax for the year is nil and you meet the eligibility criteria, submit Form 15G (for individuals below 60) or Form 15H (for senior citizens) to the fund house at the beginning of the financial year to request non-deduction of TDS.
Check Form 26AS
Investors should regularly check their Form 26AS on the Income Tax e-filing portal. This form provides a consolidated statement of all taxes deducted at source. You can use it for understanding your Form 26AS to verify that the TDS deducted by the AMC has been correctly deposited with the government.
Claim TDS Credit in ITR
The TDS deducted under Section 194K is essentially an advance tax paid on your behalf. When filing your Income Tax Return, you can claim this amount as a credit against your final tax liability.
File ITR to Claim Refund
If the total TDS deducted is more than your actual tax liability for the year, you can claim a refund. This can happen if your total income falls below the taxable limit. Filing an ITR is necessary to receive this refund.
Penalties for Non-Compliance with Section 194K
If the deductor, such as an AMC, fails to comply with the provisions of Section 194K, they face penalties. The Income Tax Act has strict rules to ensure that TDS is deducted and paid to the government on time.
The penalties for non-compliance are as follows:
Interest for non-deduction of TDS: An interest of 1% per month or part of a month is charged from the date the TDS was supposed to be deducted until the date it is actually deducted.
Interest for non-payment of TDS: If the TDS is deducted but not deposited with the government, an interest of 1.5% per month or part of a month is charged from the date of deduction to the date of actual payment.
Other Penalties: In addition to interest, other penalties and even prosecution can be initiated under the Income Tax Act for significant defaults in TDS compliance.
Impact of Section 194K on SIP Investments
The application of Section 194K on a Systematic Investment Plan (SIP) can sometimes be confusing for investors. However, the rule is straightforward.
Section 194K applies to the dividend income component of your mutual fund investment, regardless of whether you invested via a lump sum or a SIP. If a fund you invested in through a SIP declares a dividend, and the total dividend paid to you by that fund house in a financial year crosses the threshold, TDS will be deducted on that dividend amount. This section does not apply to the capital gains you might realize when you redeem the units from your SIP investment.
Illustration/Example of TDS Calculation under Section 194K
Here are a few examples to show how TDS under Section 194K is calculated in different scenarios.
Assumptions:
The examples for FY 2024-25 use the Rs. 5,000 threshold.
The example for FY 2025-26 uses the new proposed Rs. 10,000 threshold.
Scenario 1:
Mr. A receives a dividend of Rs. 8,000 from XYZ Mutual Fund in FY 2024-25. He has provided his PAN.
Since the income (Rs. 8,000) is more than the Rs. 5,000 threshold, TDS applies.
TDS Calculation: 10% of Rs. 8,000 = Rs. 800.
Scenario 2:
Ms. B receives a dividend of Rs. 4,000 from ABC Mutual Fund in FY 2024-25.
Since the income is below the Rs. 5,000 threshold, no TDS will be deducted.
Scenario 3:
Mr. C receives a dividend of Rs. 12,000 from PQR Mutual Fund in FY 2025-26 (after the new rule is effective). He has provided his PAN.
The income (Rs. 12,000) exceeds the new Rs. 10,000 threshold.
TDS Calculation: 10% of Rs. 12,000 = Rs. 1,200.
Scenario 4:
Ms. D receives a dividend of Rs. 8,000 from LMN Mutual Fund in FY 2024-25, but she has not provided her PAN.
Since the income is above the Rs. 5,000 threshold and PAN is not available, a higher TDS rate applies.
TDS Calculation: 20% of Rs. 8,000 = Rs. 1,600.
Conclusion: Key Takeaways on Section 194K
The rules of Section 194K are an important aspect of managing your mutual fund investments. It has shifted the way dividend income is taxed, making it crucial for investors to be well-informed. Staying updated on these regulations helps in effective tax planning.
Here are the key takeaways:
Mandatory TDS: Section 194K requires AMCs to deduct TDS on mutual fund dividends paid to resident investors if the income exceeds the threshold.
Thresholds: The current threshold is Rs. 5,000. This is proposed to increase to Rs. 10,000 from FY 2025-26.
TDS Rates: The standard rate is 10% with a valid PAN and 20% without one.
Excludes Capital Gains: This rule does not apply to profits made from selling or redeeming mutual fund units.
Investor Action: It is important to keep your PAN updated, check Form 26AS, and claim the TDS credit while filing your ITR.
By understanding these points, you can manage your tax obligations more effectively. If you have further questions, you can always contact TaxBuddy experts for assistance.
Frequently Asked Questions (FAQs) about Section 194K
What is Section 194K of the Income Tax Act?
Section 194K is a rule that mandates a 10% Tax Deducted at Source (TDS) on dividend income from mutual funds paid to resident investors if the income exceeds a certain threshold in a financial year.
When was Section 194K introduced and why?
It was introduced in Budget 2020, effective April 1, 2020. It was brought in to tax dividend income in the hands of investors after the abolition of the Dividend Distribution Tax (DDT).
What is the current TDS rate under Section 194K if PAN is provided?
The current TDS rate is 10% if you have provided your PAN.
What is the TDS rate if PAN is not provided?
The TDS rate increases to 20% if a valid PAN is not furnished to the deductor.
What is the threshold limit for TDS deduction under Section 194K for FY 2024-25?
For the financial year 2024-25, the threshold limit is Rs. 5,000.
Is there a proposed change to the threshold limit for Section 194K?
Yes, as per Budget 2025, the threshold is proposed to be increased to Rs. 10,000 starting from the financial year 2025-26.
Does Section 194K apply to capital gains from mutual fund redemption?
No, this section only applies to dividend income. It does not apply to capital gains from the sale or redemption of mutual fund units.
Who is responsible for deducting TDS under Section 194K?
The entity paying the income, which is typically the Asset Management Company (AMC) or the fund house, is responsible for deducting TDS.
Is Section 194K applicable to Non-Resident Indians (NRIs)?
No, Section 194K applies only to residents. TDS for NRIs is handled under Section 195.
Can I submit Form 15G/15H to avoid TDS under Section 194K?
Yes, if you are eligible (i.e., your total tax liability for the year is nil), you can submit Form 15G or 15H to the fund house to request no deduction of tax.
How can I check if TDS has been deducted under Section 194K?
You can check your Form 26AS on the income tax portal. It will show the details of all TDS deducted and deposited in your name.
How do I claim credit for TDS deducted under Section 194K?
You can claim the TDS amount as a tax credit against your total tax liability when you file your Income Tax Return (ITR).
Does Section 194K apply to dividends from Systematic Investment Plans (SIPs)?
Yes, if the dividend income from your SIP investments in a particular fund house exceeds the threshold in a financial year, TDS will be deducted.
What happens if the deductor fails to deduct or deposit TDS under Section 194K?
The deductor will be liable to pay penal interest for the delay in deduction or deposit.
What if the dividend is credited to a suspense account? Does 194K still apply?
Yes, the rule applies at the time of credit or payment, whichever is earlier. Crediting to a suspense account is considered a deemed payment, and TDS must be deducted.
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