TDS on Mutual Fund Dividends: How to Track, Claim Refund and Avoid Double Taxation

Why TDS on Mutual Fund Dividends Matters Again

Ever since the Finance Act 2020 abolished the Dividend Distribution Tax (DDT) and shifted dividend taxation to the investor, TDS under Section 194K has applied on income distributions from mutual funds. In FY 2025-26 this remains one of the most misunderstood deductions in retail portfolios — especially among investors who chose the Income Distribution cum Capital Withdrawal (IDCW) option without realising the tax mechanics behind it.

If you receive IDCW from any equity, debt, or hybrid scheme, the Asset Management Company (AMC) is legally required to deduct 10% TDS before crediting the payout to your bank account once aggregate dividends in a financial year cross ₹10,000 per AMC per PAN. For NRIs the rate is higher and operates under Section 195. Knowing how to track, reconcile and claim this TDS can prevent both under-reporting and the silent leakage of refunds.

Section 194K: The Rule in Plain English

Section 194K of the Income Tax Act requires any person responsible for paying income in respect of mutual fund units to deduct tax at source. Key points for FY 2025-26:

• •Rate: 10% for resident investors with a valid PAN. If PAN is not linked with Aadhaar or is inoperative, TDS jumps to 20% under Section 206AA.
• •Threshold: No TDS if total IDCW from a particular AMC does not exceed ₹10,000 in the financial year.
• •Scope: Applies only to dividend/IDCW payouts — NOT to capital gains on redemption. Capital gains are taxed separately under Section 111A, 112, or 112A.
• •NRIs: 20% TDS under Section 195 (plus applicable surcharge and cess), subject to DTAA relief.

A common myth is that growth-option investors also face TDS. They do not. TDS under 194K is triggered only when the AMC distributes income; growth option holders pay tax only at the time of redemption, and that too as capital gains.

How AMCs Actually Deduct and Report

When an IDCW is declared, say ₹5 per unit on 10,000 units held, the gross dividend is ₹50,000. The AMC deducts ₹5,000 (10%) and credits ₹45,000 to your bank account. The deducted ₹5,000 is then deposited with the government against your PAN and reflected in:

The AMC issues Form 16A on a quarterly basis. You can download it from the CAMS or KFintech investor portal under the TDS certificates section. Always match Form 16A figures with AIS before filing your return.

Claiming the TDS Credit in Your ITR

The full IDCW received must be reported as Income from Other Sources in your ITR, and the TDS deducted is claimed as a credit against your total tax liability. Here is the simple mechanics:

1. Report gross dividend (₹50,000 in our example), not the net amount credited.

2. Claim TDS credit of ₹5,000 in Schedule TDS of the ITR.

3. If your slab rate is lower than 10%, you get a refund of the excess.

4. If your slab rate is higher, you pay the differential tax.

For example, a senior citizen with ₹4 lakh of total income under the new regime has zero tax liability (rebate under Section 87A makes income up to ₹12 lakh tax-free in FY 2025-26 under the new regime). The entire ₹5,000 TDS becomes refundable. Conversely, a 30% slab taxpayer must pay an additional 20% (₹10,000) as differential tax on the ₹50,000 dividend.

Common Mistakes That Cost Investors Money

1. Forgetting to file ITR when income is below the basic exemption limit. Many retired investors assume no return is needed. But unless you file, the TDS sits with the government. File ITR-1 or ITR-2 even if your only purpose is reclaiming TDS.

2. Reporting the net amount instead of gross. If you report ₹45,000 instead of ₹50,000, your TDS credit claim of ₹5,000 will be flagged by the CPC system as inconsistent with AIS.

3. Ignoring inoperative PAN. From July 2023 onwards, PANs not linked with Aadhaar became inoperative. TDS on such PANs is deducted at 20% — double the normal rate. Always verify PAN status before the financial year ends.

4. Missing Form 15G/15H opportunity. Residents whose total income is below the taxable threshold can submit Form 15G (below 60) or Form 15H (60 and above) to the AMC at the start of the year to request non-deduction of TDS. Most AMCs accept this through their online portals.

5. Confusing dividend TDS with capital gains TDS. There is NO TDS on capital gains from mutual fund redemptions for resident investors. If you see a deduction on redemption proceeds, it is likely from an NRI folio or an error worth raising with the RTA.

Reconciliation Checklist Before Filing ITR

Before you click submit, run through this quick checklist:

• •Download Form 26AS, AIS and Form 16A from each AMC.
• •Cross-check IDCW dates and amounts in AIS with your bank statements.
• •Confirm TDS amounts add up to what is shown in 26AS.
• •Report any AIS discrepancy through the Feedback option on the e-filing portal — this prevents notices later.
• •Use the Schedule OS to disclose dividend income and Schedule TDS-2 to claim the credit.

If you invest across multiple AMCs, remember the ₹10,000 threshold is per AMC, not aggregate. An investor with ₹8,000 dividend from one AMC and ₹9,000 from another faces zero TDS but still owes tax on ₹17,000 at slab rate.

Should You Switch from IDCW to Growth?

For most retail investors in the accumulation phase, the Growth option is more tax-efficient because it defers tax until redemption, allowing compounding on the un-taxed amount. IDCW makes sense only for those who genuinely need a regular cash flow and cannot manage a Systematic Withdrawal Plan (SWP). For senior citizens in low slabs, IDCW with Form 15H submission can work — but for higher-slab taxpayers, dividends are taxed at marginal rates (up to 30% plus surcharge) which is far worse than the 12.5% LTCG rate on equity funds held over a year.

E-Square Tip: Before March 31 every year, log into the CAMS and KFintech portals, download a consolidated dividend statement and Form 16A, and cross-tally with AIS. If your total income is below the taxable threshold, file Form 15G/15H with each AMC in April itself — this stops TDS at source and saves you the wait for a refund.