TDS on IDCW
Tax deducted at source at 10 percent on an IDCW from a mutual fund scheme above Rs 5,000 — applicable even to resident investors, unlike redemption proceeds, which carry no TDS for residents.
In plain language
Tax deducted at source means the payer — here the mutual fund — keeps back part of a payment and deposits it with the government on the investor's behalf.
For resident mutual fund investors, most payments come without any deduction. The workbook: there is no TDS on re-purchase proceeds to resident investors. The exception is the distribution. In case of dividends (IDCW) from mutual fund schemes, even for resident Indians, TDS is applicable. The tax is required to be deducted at 10 percent on the dividend amount if it exceeds Rs 5,000.
TDS is collection in advance, not an additional tax. The IDCW is still part of the investor's taxable income, taxed at the applicable slab.
How it works
The rules in Chapter 8.8.
| Payment | Resident investor | Non-resident investor |
|---|---|---|
| IDCW | 10 percent if it exceeds Rs 5,000 | Rates prescribed for non-residents |
| Redemption / re-purchase | No TDS | TDS applicable |
The regulations prescribe different rates depending on the nature of the investor (Indian or foreign, individual or institutional), the nature of the investment (equity or debt) and the nature of the income (dividend or capital gain).
Non-residents and DTAA. India has Double Taxation Avoidance Agreements with several countries, which also specify withholding rates. TDS for a non-resident is the lower of the rate under the income tax regulations or the rate in the DTAA of the investor's country of residence — provided the investor gives sufficient information and documents to satisfy the mutual fund that the concessional rate applies. Chapter 9 adds that once an investor is flagged as an NRI, TDS is deducted on gains from sale or redemption.
The background. Before the February 2020 Budget, dividends were tax-free in the investor's hands and dividend distribution tax was paid out of the scheme. Since then, the distribution is taxed in the investor's hands at the applicable slab.
Stale figure. The workbook's Rs 5,000 threshold is the one to use in the exam. The Union Budget 2025 raised the TDS threshold on mutual fund income distributions to Rs 10,000 from 1 April 2025; the workbook has not yet caught up.
A worked example
Three investors in the IDCW option of the same scheme receive a distribution. Figures are illustrative; the rules are the workbook's.
| Investor | IDCW received | TDS |
|---|---|---|
| Gopal, resident | Rs 4,800 | Nil — does not exceed Rs 5,000 |
| Shalini, resident | Rs 18,000 | 10% = Rs 1,800; she receives Rs 16,200 |
| Imran, NRI in a DTAA country | Rs 18,000 | Lower of the income-tax rate and the DTAA rate, if he documents his eligibility |
Shalini at year-end. Her Rs 18,000 is added to her income. At a 30 percent slab (illustrative) the tax is Rs 5,400; Rs 1,800 has already been deducted, leaving Rs 3,600 to pay.
Gopal redeems units worth Rs 3,00,000 the same month. As a resident, no TDS is deducted from the proceeds — his capital gain is still taxable, but he pays it himself.
Under the post-April 2025 threshold of Rs 10,000 noted above, Gopal would still have no TDS and Shalini's deduction would be unchanged.
Why NISM asks about it
Chapter 8.8 (Tax Deducted at Source) is short and numeric, which makes it reliable question material: 10 percent above Rs 5,000, even for residents; no TDS on repurchase proceeds to residents; and the lower of the IT Act rate or the DTAA rate for non-residents with supporting documents. Chapter 8.3 explains why IDCW is now taxed in the investor's hands.
Common exam traps
- TDS applies to IDCW even for resident Indians — the most-missed point.
- No TDS on redemption proceeds to residents; non-residents do face TDS on redemption gains.
- "Exceeds Rs 5,000" — a distribution of exactly Rs 5,000 does not cross the workbook threshold.
- For NRIs, the lower of the Income Tax Act rate and the DTAA rate, only with documents that satisfy the fund.
- TDS is not the final tax — the IDCW is still taxed at the investor's slab rate.
- Stale figure: the workbook says Rs 5,000; the threshold is Rs 10,000 from 1 April 2025. Use the workbook figure in the exam.
Where this is taught
- Series V-D · Chapter 8: Taxationintroduced here
- Series V-B · Chapter 8: Mutual fund Taxationintroduced here
Related terms
- Dividend Distribution TaxThe tax a mutual fund scheme itself deducted before paying a dividend, abolished from April 2020 — since when the payout has instead been taxed in the investor's own hands at their slab rate.
- Double Taxation Avoidance AgreementA treaty between two or more countries that prevents the same income being fully taxed twice, either by allocating the taxing right or by the residence country giving credit for tax paid at source.
- IDCWThe renamed dividend option of a mutual fund scheme — a payout that is part income and part return of your own capital, which is why the NAV falls by exactly the amount distributed.
- Marginal Slab RateThe investor's own applicable income-tax slab rate. It taxes IDCW, short-term gains on most non-equity schemes, and all gains on debt-oriented funds and debt ETFs.
- Transfer of IDCW planA facility that automatically invests the IDCW (dividend) declared in one scheme into another scheme of the same mutual fund, on the next business day after the record date.