If you picked the IDCW (Income Distribution cum Capital Withdrawal) option in a mutual fund, you may have seen a smaller payout than you expected. The missing 10% is usually Section 194K TDS. It is not a new tax. It is tax collected in advance and adjusted when you file your return.
Quick answer: Section 194K requires your mutual fund house to deduct 10% TDS on dividend (IDCW) payouts when your total payout from that fund house crosses ₹10,000 in a financial year. The limit rose from ₹5,000 to ₹10,000 on 1 April 2025. No TDS applies to redemptions or capital gains, and you can claim the TDS back in your ITR if your total tax is lower.
This guide explains Section 194K in plain words: the rate, the ₹10,000 limit, what it covers and what it does not, how to check it in Form 26AS, and how to get a refund or stop the deduction with Form 15G or 15H.
What is Section 194K?
Section 194K of the Income-tax Act, 1961 says that any person who pays income on mutual fund units to a resident investor must deduct tax at source. In practice, the “person” is the mutual fund house — the AMC (asset management company) that runs the scheme.
The section started on 1 April 2020, through the Finance Act, 2020. That was the same date the Dividend Distribution Tax (DDT) was removed. Before that date, the fund house paid tax on dividends before handing them to you. After that date, dividends became taxable in your hands, at your slab rate, and Section 194K was added so that some tax is collected at the time of payment.
Section 194K covers income from units of:
- a mutual fund specified under Section 10(23D),
- the Administrator of the specified undertaking (the old UTI set-up),
- a specified company.
For most readers, only the first point matters: units of a regular mutual fund. The income it covers is the dividend — now called IDCW payout. The section clearly leaves out income in the nature of capital gains. That one line decides most of the confusion around this rule.
Section 194K TDS rate and threshold
The numbers are simple. There are only three to remember.
| Item | Rule for FY 2025-26 |
|---|---|
| TDS rate (PAN given) | 10% of the IDCW payout |
| TDS rate (PAN not given, or inoperative PAN) | 20% under Section 206AA |
| Threshold | No TDS if total IDCW from one fund house is ₹10,000 or less in the financial year |
The threshold works on the total for the year, per fund house (AMC), per PAN. All your folios and schemes with the same AMC are counted together. If you hold funds with two different AMCs, each AMC checks its own ₹10,000 limit on its own.
Two points about the threshold catch people out:
- Once the limit is crossed, TDS applies to the full amount, not only the part above ₹10,000. If your total IDCW from one AMC is ₹18,000, the TDS is 10% of ₹18,000, which is ₹1,800. It is not 10% of ₹8,000.
- The AMC deducts at the time the income is credited or paid, whichever comes first. You do not get a chance to pay it later in the year.
What changed in FY 2025-26: the limit doubled
Before 1 April 2025, the threshold was ₹5,000. The Finance Act, 2025 (Budget 2025) raised it to ₹10,000 from 1 April 2025. The rate stayed at 10%.
This change helps small IDCW investors directly. If your yearly dividend from one fund house is between ₹5,001 and ₹10,000, no TDS is cut now. In FY 2024-25, the same payout would have lost 10% at source.
A warning: many older articles and broker pages still show ₹5,000. They were written before the Budget 2025 change and never updated. If a page quotes ₹5,000 for the current year, treat it as out of date.
What Section 194K does not cover
This is where most wrong advice starts. Section 194K applies only to IDCW payouts. It does not apply to:
- Redemption proceeds. When you sell or redeem units, the AMC pays you the full amount. No TDS under 194K. Capital gains are taxed separately when you file your return.
- Capital gains of any kind. Short-term or long-term gains from selling units are outside this section.
- Growth option payouts. Growth plans do not pay IDCW, so there is nothing for 194K to deduct from. You pay tax only on gains when you redeem.
- SWP withdrawals. A systematic withdrawal plan is a redemption of units, not a dividend. No 194K TDS applies to SWP money, though capital gains on the redeemed units are still taxable.
- IDCW in the growth sense. Only the IDCW payout or reinvestment counts.
So if you are on the growth option and you never take an IDCW payout, Section 194K will never touch your money. The choice between IDCW and growth is also a tax choice, not just a cash-flow choice — our mutual fund taxation guide explains why dividends are taxed at slab rates while equity gains get the lower 12.5% long-term rate.
IDCW payout vs IDCW reinvestment: TDS applies to both
Some investors pick the IDCW reinvestment option and assume no TDS applies because no cash reaches their bank account. That is wrong. TDS applies to the IDCW amount even when it is reinvested into new units.
Take a payout of ₹15,000 under the reinvestment option. The AMC deducts 10% — ₹1,500 — and reinvests only the remaining ₹13,500. The full ₹15,000 still counts as your income for the year and must be shown in your ITR. The ₹1,500 TDS sits in your Form 26AS as a credit.
The same logic applies to the payout option: the AMC credits ₹13,500 to your bank account after cutting ₹1,500, and you report ₹15,000 as dividend income.
How the AMC deducts and reports the TDS
The AMC deducts the tax and deposits it with the government. It then files a quarterly TDS statement in Form 26Q. That statement is what pushes the entry into your Form 26AS and your Annual Information Statement (AIS).
You can check the deduction in three places:
- Form 26AS — on the e-filing portal, under the TDS section. The AMC’s name and the deducted amount appear here.
- AIS — the wider statement that also shows the dividend income itself.
- Form 16A — the TDS certificate the deductor issues for non-salary TDS. From 1 April 2026, the certificate for this kind of income is called Form 131 under the new Act. You can download it from the TRACES portal once the quarterly statement is processed.
How to claim the TDS credit or refund in your ITR
TDS under Section 194K is not your final tax. It is an advance collection. Your real tax on the dividend is your slab rate on the full dividend amount.
When you file your return:
- Report the full dividend under “Income from Other Sources”.
- Pick up the TDS credit from your Form 26AS/AIS — it is pre-filled in most cases.
- The TDS is adjusted against your total tax. If your total tax is lower than the TDS cut, the extra comes back as a refund.
- If your total income is below the basic exemption limit, the whole TDS comes back as a refund.
One thing to keep in mind: the dividend itself is fully taxable. There is no exemption on mutual fund dividends any more. The ₹10,000 limit only decides whether TDS is cut at source — it does not make the income tax-free.
How to stop the TDS with Form 15G or 15H
If your total income for the year is below the taxable limit, you can submit Form 15G (if you are below 60) or Form 15H (if you are 60 or above) to the AMC at the start of the financial year. The AMC then does not deduct TDS under Section 194K. The same forms also work for TDS on FD interest under Section 194A.
A few rules for this route:
- Submit the form to each AMC separately. One form does not cover all your fund houses.
- File it in April, before the first IDCW payout of the year. A form filed after a payout cannot undo the TDS already cut.
- File a fresh form every year.
- Give a false declaration and you can face a penalty under Section 277 — the form is a declaration that your tax is nil, so use it only if that is true.
If you do not qualify for 15G/15H, you cannot stop the deduction. You can only claim the credit or refund through your return.
Section 194K for NRI investors
Section 194K applies only to resident investors. If you are an NRI, the AMC deducts under Section 196A instead — 20% on the income from units, or the lower rate under a Double Taxation Avoidance Agreement (DTAA) if you have a Tax Residency Certificate. NRIs cannot use Form 15G or 15H. If a lower DTAA rate applies, you claim the relief in your return.
Section 194K under the new Income-tax Act, 2025
From 1 April 2026, the Income-tax Act, 2025 replaces the 1961 Act for new transactions. The old Section 194K maps to Section 393(1), Table Sl. No. 4(i) of the 2025 Act. The rate and the ₹10,000 threshold stay the same — only the section number changes.
For payments made up to 31 March 2026, keep using the old reference, Section 194K of the 1961 Act. For payments on or after 1 April 2026, the correct reference is Section 393(1). The old Form 16A certificate also gets a new number — Form 131 — under the new rules.
Worked examples
Example 1 — below the limit. You get ₹9,500 IDCW from one AMC in FY 2025-26. No TDS is deducted. You still report ₹9,500 as income in your return.
Example 2 — above the limit. You get ₹18,000 IDCW from one AMC. TDS is 10% of ₹18,000, which is ₹1,800. You receive ₹16,200 and report ₹18,000 as income. The ₹1,800 is your tax credit.
Example 3 — two AMCs. You get ₹8,000 from AMC A and ₹8,000 from AMC B. Neither AMC crosses its own ₹10,000 limit, so no TDS is cut by either. Your total dividend of ₹16,000 is still fully taxable at your slab rate.
Example 4 — no PAN. You get ₹18,000 IDCW but your PAN is not given or is inoperative. TDS is 20% — ₹3,600. Keep your PAN linked with Aadhaar so this does not happen.
Frequently asked questions
What is Section 194K TDS?
Section 194K requires the mutual fund house to deduct tax at source on IDCW (dividend) payouts to resident investors. It started on 1 April 2020, when the Dividend Distribution Tax was removed and dividends became taxable in the investor’s hands. It does not apply to capital gains.
What is the TDS rate under Section 194K?
The rate is 10% if you have given a valid PAN. If no PAN is given, or the PAN is inoperative, the rate is 20% under Section 206AA. The rate has not changed since the section began.
What is the threshold limit for Section 194K TDS?
No TDS is deducted if your total IDCW from one fund house is ₹10,000 or less in a financial year. This limit applies from 1 April 2025 (FY 2025-26). Before that, the limit was ₹5,000. Once the total crosses ₹10,000, TDS is cut on the full amount, not only on the part above the limit.
Does TDS apply on mutual fund redemption?
No. Section 194K does not apply to redemption proceeds, SWP withdrawals, or capital gains from selling units. It applies only to IDCW payouts, including IDCW reinvested into new units. Capital gains on redemption are taxed separately in your return.
Is TDS deducted on IDCW reinvestment?
Yes. Even though no cash reaches your bank account, the AMC deducts 10% and reinvests the rest. If ₹15,000 is declared under the reinvestment option, ₹1,500 is cut as TDS and ₹13,500 is reinvested. The full ₹15,000 must be reported as income.
How do I claim a refund of Section 194K TDS?
File your ITR and report the full dividend as income. The TDS appears as a credit in your Form 26AS and is usually pre-filled. If the TDS is more than your total tax, the extra is refunded. If your income is below the taxable limit, the whole TDS comes back.
Can I submit Form 15G or 15H to avoid 194K TDS?
Yes, if your total income for the year is below the taxable limit. Submit Form 15G (below 60 years) or Form 15H (60 and above) to each AMC at the start of the financial year, and file a fresh form every year. NRIs cannot use these forms.
Official sources
- Income Tax Department, e-filing portal — https://www.incometax.gov.in
- Income Tax Department, TDS rates and provisions — https://www.incometaxindia.gov.in
- TRACES (TDS Centralized Processing Cell), Form 16A / certificates — https://www.tdscpc.gov.in
Reviewed by Asuthod Rathod, CA · Last updated: 9 November 2026
Disclaimer: This article explains tax rules in simple words for general information. Tax law changes often, and your own case may have details that change the result. Check the official portals above or speak to a qualified tax professional before acting on it.
Editorial byline for eircicai income tax guides — covering the Income Tax Act, 2025, section renumbering, regime comparison, and deductions. Content is reviewed by Asuthod Rathod, CA.