Section 194K of Income Tax Act: TDS on Mutual Fund Income

In summary

Section 194K of the Income-tax Act, 1961, deals with TDS on specified income paid to resident investors in respect of mutual fund units. The current TDS rate is 10%, subject to the applicable threshold and conditions.

• TDS under Section 194K generally applies when specified income exceeds Rs. 10,000 during a financial year.
• The Rs. 10,000 threshold applies from 1 April 2025.
• Capital gains are specifically excluded from TDS under Section 194K.
• The section applies to payments made to resident investors; non-resident investors are generally covered by Section 195.

• TDS is a tax credit, not necessarily the investor’s final tax liability.

  
  

For example, if you receive Rs. 20,000 of eligible income from mutual fund units during a financial year, 10% TDS would generally mean Rs. 2,000 is deducted, subject to the applicable provisions.

Section 194K requires the person responsible for making certain payments to a resident in respect of eligible units to deduct TDS. The standard rate specified under the section is 10%.

The deduction is generally made when the income is credited to the payee’s account or paid, whichever happens earlier. The section also covers units from specified undertakings and specified companies. Capital gains are specifically excluded from its scope.

Section 194K was introduced through the Finance Act, 2020, and became effective from 1 April 2020.

You can explore mutual fund schemes to understand different types of schemes.

The standard TDS rate under Section 194K is 10%. From 1 April 2025, the threshold for deducting TDS increased from Rs. 5,000 to Rs. 10,000 during a financial year. 

The current provisions can be summarised as follows.

Last updated: September 2026

The Rs. 10,000 threshold relates to TDS deduction. It does not mean that income below or above this amount is automatically tax-free. Your final Income Tax liability depends on the applicable provisions and your overall taxable income.

Section 194K covers specified income in respect of eligible units, but it specifically excludes income in the nature of capital gains. For mutual fund investors, this distinction separates income distributions from gains arising when units are redeemed or transferred.

Income distributions

Specified income distributed in respect of eligible mutual fund units can attract TDS under Section 194K when the applicable threshold and other conditions are met.

Capital gains

Capital gains from selling or redeeming mutual fund units are not subject to TDS under Section 194K. However, the gains can still be taxable separately under the applicable capital gains provisions.

You can read more about mutual fund units, Section 112A, and Section 111A.

Suppose you are a resident investor and receive Rs. 20,000 of eligible income covered by Section 194K during FY 2026-27. Assuming the payment is fully subject to the standard 10% TDS rate, Rs. 2,000 would be deducted, and you would receive Rs. 18,000 after TDS.

The Rs. 2,000 is not necessarily your final tax on that income. You can generally claim the TDS as tax credit while filing your Income Tax return, subject to the applicable rules.

For example, if your final Income Tax liability on the relevant income is lower than the TDS already deducted, the excess may be refundable after your return is processed.

No. Capital gains are excluded from Section 194K. If you sell or redeem mutual fund units and realise a capital gain, TDS is not deducted under Section 194K on that capital gain. 

This does not make the capital gain tax-free. It can still be taxable under the applicable capital gains provisions, depending on factors such as the type of mutual fund, holding period, and date of acquisition.

For related information, see Section 56 of the Income Tax Act.

Section 194K applies to specified payments made to residents. Income earned by a non-resident from mutual fund units can instead be subject to TDS under Section 195, along with applicable provisions, tax treaties, and conditions. 

You should therefore not apply the resident-investor treatment under Section 194K to a non-resident without checking the applicable provisions.

PAN is important for TDS compliance. Under Section 206AA, where a deductee does not furnish a valid PAN, tax can be deducted at the higher applicable rate, including 20% where the section requires it. 

The 20% rate should therefore not be described as the normal Section 194K rate. The standard Section 194K rate is 10%; the higher rate can arise because of the separate PAN-related provision.

The Finance Act, 2020 introduced Section 194K as part of changes to the taxation of specified income from mutual fund units after the abolition of Dividend Distribution Tax. The provision shifted the relevant taxation framework towards the recipient, with TDS applying to specified income.

The current framework should not be confused with the earlier Dividend Distribution Tax regime.

You can also refer to Income Tax slabs and Income Tax return updates.

Section 194K is primarily a TDS provision, rather than a separate tax on mutual fund investments. Keep these points in mind when reviewing your mutual fund income and tax records.

• TDS rate: The standard rate under Section 194K is 10%.
• Threshold: The threshold is Rs. 10,000 from 1 April 2025.
• Capital gains: Capital gains are outside the scope of Section 194K.
• Residency: Section 194K applies to specified payments to residents.
• PAN: A higher TDS rate can apply when PAN requirements are not met.
• Tax credit: TDS deducted can generally be claimed as a tax credit while filing your Income Tax return, subject to the applicable rules.

For further reading, you can explore Section 43B and other Income Tax provisions relevant to your circumstances.

Section 194K provides for TDS on specified income in respect of eligible units paid to resident investors. The standard rate is 10%, and the threshold is Rs. 10,000 from 1 April 2025.

The key distinction is between TDS and final Income Tax liability. Capital gains are excluded from Section 194K, but they can still be taxable under the applicable capital gains provisions.

Last reviewed: September 2026

Mutual funds are subject to market risk. Please read the scheme-related documents carefully before investing.