No more TDS Stress! Avoid Penalties

Ensure a higher TDS deduction for
inoperative PANs with Clear
Ensure a higher TDS deduction for inoperative PANs with Clear
Request a Demo

Section 194K—Tax Deduction on Income from Mutual Fund Units

By Shefali Mundra

|

Updated on: Mar 13th, 2025

|

2 min read

Section 194K prescribes TDS deduction at the rate 10% on dividend paid on mutual funds to residents. This resulted in the elimination of double taxation, which happened due to previous tax laws. 

Under the previous laws, tax on mutual fund payout was levied when the company distributed to the AMC(Asset Management Company) and when the AMC distributed the same to the unit holders. 

Let’s discuss Section 194K in detail. 

Types of Income from Mutual Fund Units

In general, an individual can earn two types of income by investing in mutual fund units. They are:

Sl.No.

Income Type

Chargeability to Tax

1.Dividend
  • DDT has been abolished as per the Budget 2020. 
  • From FY 2020-21, dividend income will be taxable in the hands of the receiver/investor.
  • However, Section 194K requires the mutual fund to deduct TDS while distributing dividends exceeding Rs 10,000 to unitholders. 
2.Capital Gains
  • Capital gains are taxable in the hands of the taxpayer. Any long-term capital gains earned from equity-oriented mutual funds will be taxed at the rate of 12.5% if the gains exceed Rs 1.25 lakh in a year. 
  • Similarly, any short-term capital gains earned from the equity-oriented mutual funds, subject to STT, will be taxed at the rate of 20%.  
  • However, Section 194K does not require a mutual fund to deduct TDS on capital gains arising on redemption of units by unitholders.

Section 194K

As per Section 194K, any person responsible for paying a resident with respect to:

  • Units of a mutual fund as per Section 10(23D)
  • Units from the administrator
  • Units from a specified company

Shall deduct TDS at the time of credit of such income to the payee’s account or at the time of making payment, whichever is earlier.

Purpose of Section 194K

Under the previous income tax laws, dividends were taxed twice. Initially, a tax was imposed when a company would pay a dividend to an Asset Management Company (AMC). The second imposition of the tax was when the AMC would distribute its profits to the unitholders.

An investor can either choose to invest the profits back into the fund or earn dividend income. If the investor chooses to earn dividend income, the AMC will again be required to pay DDT on the distribution of dividends.

In Budget 2020, DDT is abolished. Now, AMC is only required to deduct TDS at 10% on the distribution of dividends, provided that the dividend paid per recipient exceeds Rs 10,000 in an FY.

Please note-

  • TDS should be deducted at 20% if the investor does not provide PAN.
  • In the case of NRI investors, TDS should be deducted as per Section 195

What is the rate of TDS?

  • The rate of TDS is 10%. 
  • The rate of TDS will be 20% in all cases if PAN is not quoted by the deductee.

Exceptions to the section if any

TDS under Section 194K is not required to be deducted in the following cases:

  • Tax under section 194K is not required to be deducted at source if the dividend income is up to Rs 10,000 in a financial year.
  • Capital gain income is also exempted from the applicability of Section 194K.

Income Tax Provision Before Section 194K

  • Under the current regime, the onus of reporting dividend income and capital gains was on individual investors. Dividend income from mutual funds was exempt under Section 10(35).
  • On the other hand, there was no provision regarding TDS deduction on any income earned from mutual funds. Only NRIs were subject to TDS. 
  • DDT was charged on the company distributing dividends, but the same was tax-free in the taxpayer’s hands.

Conclusion

To sum up, this section has shifted the burden of tax payment on dividend income from the company  to the recipient of such dividend income.

Related Articles

TDS rate chart
Dividends – Meaning, Advantages & Tax Implications
Taxation of Capital Gains of Equity Funds

Can't get yourself started on taxes?
Get a Cleartax expert to handle all your tax filing start-to-finish

Frequently Asked Questions

Who Deducts TDS Under Section 194K of the Income Tax?

The AMC or fund houses now have to deduct TDS while transferring the income to the payee’s account. Income from the following units is subject to deduction under the Section 194K of the Income Tax:

  • Mutual Fund units as per section 10(23D).
  • Units from a specified company.
  • Units from the administrator of specified undertakings.
When is Section 194K levied?

For the purpose of TDS, Section 194K is applicable when such income as specified in this section in a financial year exceeds ₹10,000.

Can TDS on dividend be refunded?

It is important to note that even if TDS is deducted on your dividend income, you can claim a refund by filing your income tax return. Therefore, it is advisable to declare your dividend income in your income tax return and claim the refund if applicable.

What is the threshold limit under section 194K?

The threshold limit under section 194K is Rs. 10,000.

Help and support
close
Loading Chat ...
Chatbot LogoChatbot Button
About the Author

As a creative finance content writer and a Chartered Accountant by profession, I am deeply passionate about educating the masses about finance and taxation. To date, I have authored numerous blog posts covering a diverse range of topics on finance, taxation, trading, and investment for esteemed financial platforms. Driven by the commitment to enhance financial literacy, my ultimate goal is to demystify complex financial concepts into relatable insights and support educational initiatives in India.. Read more

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

Company PolicyTerms of use

ISO

ISO 27001

Data Center

SSL

SSL Certified Site

128-bit encryption