TDS on MF dividend (IDCW) for residents (Section 194K)

TDS on IDCW from mutual funds for resident investors is governed by Section 194K of the Income Tax Act 1961, introduced by the Finance Act 2020 effective 1 April 2020. Section 194K requires a mutual fund to deduct tax at source at 10% on any income (specifically IDCW – Income Distribution cum Capital Withdrawal, formerly called dividend) credited or paid to a resident investor, where the aggregate IDCW from that mutual fund scheme exceeds Rs 5,000 in a financial year. IDCW income is included in the investor’s total income under Section 56(2)(i) and taxed at the applicable slab rate; the 10% TDS is a withholding that is credited against the investor’s total tax liability.

Tax advice disclaimer. This article is for educational reference only and does not constitute professional tax or financial advice. Tax law changes frequently and individual circumstances vary widely. Readers should consult a qualified Chartered Accountant or tax adviser before making any investment or tax-filing decision.

Background: pre-2020 regime

Before the Finance Act 2020, dividends from mutual funds were exempt in the hands of the investor under Section 10(35) of the Income Tax Act 1961. The tax was collected from the fund through the Dividend Distribution Tax (DDT). The Finance Act 2020 abolished DDT (effective 1 April 2020) and replaced it with the current regime: IDCW income is now taxable in the hands of the investor at slab rates, and Section 194K imposes TDS at source.

Scope of Section 194K

Section 194K applies to any income in respect of units of a mutual fund specified under Section 10(23D). The key elements:

• Who deducts: The mutual fund (through its AMC) or the specified person who distributes the income.
• Rate: 10%.
• Threshold: TDS is applicable if the aggregate IDCW paid or credited in the financial year exceeds Rs 5,000. The threshold is per mutual fund house, not per scheme.
• When deducted: At the time of payment or credit, whichever is earlier.

CBDT clarification on Section 194K scope

When Section 194K was introduced in the Finance Bill 2020, the original draft applied to all income from mutual fund units, including capital gains on redemption. CBDT issued a clarification (Press Release, 4 February 2020) that Section 194K applies only to IDCW income and not to capital gains arising from redemption of mutual fund units. This clarification is critical: resident investors do not face TDS on capital gains from mutual fund redemptions; only IDCW is subject to TDS.

The Rs 5,000 threshold

The Rs 5,000 threshold applies per AMC (per fund house), not per scheme. If an investor holds three schemes of the same AMC and each scheme distributes Rs 2,000 of IDCW in a year, the aggregate IDCW is Rs 6,000, which exceeds the threshold. TDS applies on the full Rs 6,000 (or only on the amount above Rs 5,000 depending on interpretation; in practice, AMCs deduct on the full amount once the threshold is crossed). If the investor holds schemes of different AMCs, each AMC applies the Rs 5,000 threshold independently.

Tax treatment of IDCW

IDCW income is classified under “Income from other sources” under Section 56(2)(i) and is included in the investor’s total income. It is taxed at the applicable slab rate:

New regime rates differ; investors under the new tax regime under Section 115BAC will be taxed at new-regime slab rates on IDCW.

The 10% TDS is a flat withholding regardless of the investor’s actual slab. If the investor is in the 30% slab, they must pay additional tax at the time of filing the return (and advance tax during the year). If the investor is in the nil-tax bracket, the TDS can be fully reclaimed as a refund.

Form 15G and Form 15H

Investors whose total income is below the taxable threshold and who do not expect any tax liability may submit:

• Form 15G: For individuals below 60 years of age. A self-declaration that total income is below the basic exemption limit, so no TDS should be deducted.
• Form 15H: For senior citizens (60 years and above). Similar self-declaration.

Forms 15G/15H must be submitted to the AMC at the beginning of each financial year. Once submitted, the AMC does not deduct TDS on IDCW for that year, provided the investor’s actual income remains below the threshold.

IDCW versus growth option: tax implications

Under the growth option, no IDCW is distributed; the NAV increases and all returns are realised as capital gains on redemption. Under the IDCW option, the fund distributes periodic income, which reduces the NAV on the ex-date and is taxed at slab rate (typically higher than the LTCG rate of 12.5% for long-term equity fund investors in higher brackets).

For investors in the 20% or 30% income-tax bracket who hold equity-oriented mutual funds for the long term, the growth option with LTCG at 12.5% is more tax-efficient than the IDCW option with slab-rate taxation.

NRI investors

For NRI investors, Section 195 (not Section 194K) governs TDS on IDCW from mutual funds, at 20% plus surcharge and cess (before DTAA relief). Section 194K explicitly applies only to resident investors.

Form 26AS and AIS credit

TDS deducted under Section 194K appears in the investor’s Form 26AS and Annual Information Statement (AIS) against their PAN. The credit is claimed in the ITR against total tax liability. Reconciliation of IDCW entries in the AIS with the AMC’s IDCW statements is described in the AIS/TIS mapping article.

Reporting

IDCW income is reported in Schedule OS (Income from Other Sources) of ITR-2 or ITR-3. The TDS credit is claimed in the TDS schedule. Investors should ensure all IDCW amounts (including small amounts below Rs 5,000 from individual AMCs) are reported, as the AIS captures all transactions reported by fund houses.

See also

• Equity mutual fund taxation in India
• Debt mutual fund taxation (post-April 2023)
• TDS on MF redemption for NRIs (Section 195)
• DTAA benefit for NRI MF investors
• Dividend stripping disallowance (Section 94(7))
• Annual Information Statement
• AIS/TIS mapping for MF transactions
• ITR-2

References

1. Income Tax Act 1961, Section 194K – TDS on income from mutual fund units.
2. Finance Act 2020 – introduction of Section 194K.
3. CBDT Press Release dated 4 February 2020 – clarification that Section 194K applies to IDCW only, not capital gains.
4. Income Tax Act 1961, Section 56(2)(i) – income from other sources.
5. Income Tax Act 1961, Section 10(35) – repealed dividend exemption.
6. Income Tax Act 1961, Section 197A – Form 15G/15H declarations.
7. SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2020/194 – IDCW renaming.