Archive / Mutual Fund Distributors / Taxation

nism-series-va-section-194k-dividend-tds-threshold-rules[ MUTUAL FUND DISTRIBUTORS ]

Under Section 393(1) of the Income-tax Act, 2025 (the erstwhile Section 194K of the Income-tax Act, 1961), what is the statutory rate and threshold for Tax Deducted at Source (TDS) on mutual fund IDCW (Dividend) distributions paid to resident individuals?

[ A ]20.0% TDS on all dividend payments exceeding ₹10,000.

[ B ]10.0% TDS if the aggregate dividend distribution paid or credited by an AMC to a unitholder exceeds ₹5,000 in a financial year.[ CORRECT ]

[ C ]Zero TDS — mutual fund dividends are completely exempt from withholding taxes.

[ D ]10.0% TDS on all dividend payments exceeding ₹50,000.

Takeaway

Option B is correct: 10.0% TDS if the aggregate dividend distribution paid or credited by an AMC to a unitholder exceeds ₹5,000 in a financial year.

Derivation

Section 393(1) of the Income-tax Act, 2025 (the erstwhile Section 194K of the Income-tax Act, 1961) requires AMCs to deduct tax at source on IDCW (dividend) distributions once the aggregate amount paid or credited to a unitholder in a financial year exceeds ₹5,000, at a flat rate of 10%. The threshold and the deduction both apply per AMC per financial year — it is not a lifetime or portfolio-wide limit, so an investor holding dividend plans across three fund houses could cross ₹5,000 independently with each one. Investors whose total income sits below the basic exemption limit are not automatically excused; they must proactively file Form 15G (below age 60) or Form 15H (senior citizens) with the AMC to prevent the deduction, since the AMC has no visibility into the investor's overall tax position otherwise.

Why the others fail

A — 20.0% TDS on all dividend payments exceeding ₹10,000.

20% TDS applies only where the unitholder has not furnished a valid PAN to the AMC; the standard statutory rate on dividend distributions above the threshold is 10%, not 20%.

C — Zero TDS — mutual fund dividends are completely exempt from withholding taxes.

Mutual fund IDCW distributions are taxable income in the investor's hands and are explicitly subject to withholding under Section 393(1) (the erstwhile Section 194K), not exempt from it.

D — 10.0% TDS on all dividend payments exceeding ₹50,000.

₹50,000 is the threshold used for bank fixed deposit interest under Section 393(1) (the erstwhile Section 194A); the mutual fund dividend threshold under Section 393(1) (the erstwhile Section 194K) is a much lower ₹5,000.