TDS on Mutual Fund Redemption
TDS on mutual fund redemption is nil for a resident investor. Tax deducted at source, or TDS, is tax the payer withholds before paying you. On a redemption the fund house withholds none of it from the gain. That is the answer, and most pages on this subject bury it under general TDS theory.
What follows from it is the part worth reading. Nothing is withheld, so nothing is paid on your behalf. The tax on the gain is yours to work out and pay, on a timetable that starts before you file, and the first many people hear of it is an interest demand.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and Specialised Investment Fund distributor, ARN-194216, and a distributor of portfolio management services registered with APMI, APRN10201. This page is general information, not a computation of your position.
TDS on mutual fund redemption: the answer for a resident
Nothing is withheld from the gain. A resident redeeming mutual fund units receives the proceeds without any deduction of income tax, whether the gain is short term or long term, whether the scheme is equity or debt, and whatever the size of the redemption.
This is not an administrative practice. It is written into the statute. The withholding provision for mutual fund income sits at Section 393(1), Table, Sl. No. 4(i) of the Income-tax Act 2025, and sub-section (4) of the same section lists a no-deduction condition against that entry: “If income is of the nature of capital gain.”
One charge does come out of the proceeds, and it is not income tax. Securities transaction tax of 0.001% is levied on redemption of equity-oriented units and deducted from what you receive. Debt schemes attract none. On ₹20 lakh that is ₹20, so it changes nothing about the point below, but “nothing is deducted” would be too strong a way to put it.
Two points follow from the absence of income tax withholding.
A large redemption does not settle any of your income tax in advance. Sell units worth ₹20 lakh with ₹4 lakh of gain inside them, and ₹20 lakh arrives in your account with no income tax withheld. What is owed on that ₹4 lakh depends on the scheme and the holding period, under the short term and long term rules respectively:
| If the gain is | Tax | Withheld |
|---|---|---|
| Equity, short term, at 20% plus 4% cess | ₹83,200 | ₹0 |
| Equity, long term, on ₹2,75,000 after the ₹1.25 lakh exemption, at 12.5% plus cess | ₹35,750 | ₹0 |
Both figures assume this is your only such gain in the year and that no surcharge applies. The ₹1.25 lakh exemption applies to qualifying long-term gains on equity-oriented schemes and listed equity, and is a single annual limit across all of them, so it is only available in full if nothing else has used it.
Either figure is many times the ₹10,000 at which advance tax obligations begin. That threshold applies to your net tax for the whole year after all credits, not to this redemption alone. Whether it bites depends on your other income and on what has already been deducted elsewhere.
And the absence of TDS is not the absence of tax. The two are separate. One is a collection mechanism; the other is the liability.
What the mutual fund TDS provision actually covers
Income distributed on units, not gains on selling them. The entry covers “any income in respect of units of a Mutual Fund”, the payer is “any person”, the rate is 10% and the threshold is ₹10,000. This was Section 194K under the 1961 Act, and the confusion between the two survives the renumbering.
| Item | Covered | Not covered |
|---|---|---|
| IDCW payout from any scheme | ✅ | — |
| Capital gain when a resident redeems units | — | ✅ |
| Growth option, while held | — | ✅ |
IDCW stands for income distribution cum capital withdrawal, which is what dividend options in mutual funds are now called. Where a scheme distributes income to you, the fund house withholds from that distribution. Where you sell units, it does not.
A growth option therefore has no deduction at any point until you redeem, and no deduction then either if you are a resident. Nothing touches it until you file.
The deadline this creates
Tax that nobody withholds still has a due date, and that date falls earlier than the filing deadline. This is the practical consequence of nil withholding on a redemption. It is where people are caught out, because the money has already arrived and nothing about it looked like a tax event.
Where your net tax for the year reaches ₹10,000 after whatever has been deducted elsewhere, it becomes payable in instalments through the year rather than in one payment at the end. A single large redemption can push you over that line on its own. The fund house withheld nothing, so nothing has been credited against it.
Interest on a shortfall runs at 1% a month, from the instalment date rather than from the filing date. It is not automatic on a capital gain, though: where the gain could not have been estimated in advance, the instalments falling due before it arose are not treated as short, provided the tax on it is paid in the remaining instalments. How much is owed depends on the amount unpaid and the number of months.
The instalment schedule, the thresholds and how the interest is computed are set out in income tax on investments in India. The rule worth carrying away from this page is narrower: a big redemption is a date in your calendar, not only a line in your return.
When TDS on mutual fund redemption does apply
Deduction does happen for a non-resident, taken by the fund house before the money is paid out. The position is the reverse of the resident one. That is why this question has two different answers, depending on who is asking. The rate follows the scheme and the holding period.
The statute sets the rate in one place. Section 393(2), Table, Sl. No. 10 covers “any income in respect of units of a Mutual Fund” paid to a non-resident, with no threshold, and Note 2 fixes the rate:
Tax shall be deducted at 20%, or, where a treaty applies to the payee and the payee has furnished the required certificate, the rate in that treaty for such income if that rate is lower than 20%.
Two things to be careful about here, because most pages on this subject are not.
The withholding rate and your final tax are different numbers. What the fund house deducts is set by the provision above. What you ultimately owe is worked out on your return, under the capital gains rules for the scheme and holding period. The two are reconciled when you file. Treating the deducted amount as the final liability is the common mistake.
Treaty relief is claimed, not granted automatically. It depends on the payee furnishing what the treaty and the rules require, which in practice usually means a tax residency certificate, Form 10F and a PAN on the folio sitting with the fund house before the payout rather than produced afterwards. What is required turns on the treaty and on the fund house’s own process, so confirm it for your own country before redeeming.
A non-resident’s position deserves a specific check rather than a general table, which is why this page does not print one.
TDS on IDCW, and the threshold that changed
Ten per cent is withheld once distributions from a fund house cross ₹10,000 in a financial year. Crossing the threshold brings the deduction into play; it does not make the first ₹10,000 exempt. The threshold stood at ₹5,000 until 1 April 2025 and was doubled from that date.
| Particulars | Rate / Threshold |
|---|---|
| Rate, with a PAN (permanent account number) on the folio | 10% |
| Rate, without PAN | 20% |
| Threshold | ₹10,000 a year |
The provision sets the payer as “any person” and the threshold at ₹10,000. That reads as a per-payer test, which would mean two schemes at the same fund house counted together and two houses counted separately. The provision does not spell out how a fund house aggregates across its own schemes, and practice is not uniform, so ask your fund house directly if a distribution is close to the line.
As with deposit interest, the deduction is not the final tax. IDCW is added to your income and charged at your slab rate, and the 10% already withheld is set against that.
An investor who holds growth options rather than IDCW options has nothing deducted at any stage. That is a structural difference between the two options, not a tax saving: the gain is simply taxed when the units are sold instead.
The redemption is reported, even with nothing deducted
Fund houses report unit transactions to the tax department whether or not any tax was withheld. Nil deduction does not mean the transaction is invisible to the department, which is the assumption that gets people into trouble. The Annual Information Statement is where it surfaces.
Redemptions are among the transactions reported into the Annual Information Statement, the department’s consolidated record of what it holds about your year. Check your own statement rather than assuming what it contains, and open it before you file, for two reasons.
It catches omissions. A redemption you had forgotten may be sitting there. The statement is built from what reporting entities have filed, so it can be incomplete or late, and nothing in it removes the obligation to report a transaction it has missed.
And it catches errors in the other direction. The statement reports the transaction value, not your gain. A ₹20 lakh redemption shows as ₹20 lakh, and if the units cost ₹16 lakh, the taxable gain is ₹4 lakh. Reconcile against your own capital gains statement from the fund house or the registrar, which is the document that carries the cost figures.
What to check before a large redemption
Four things, and every one of them is easier to settle before the money moves than afterwards. None takes more than a few minutes. The last one is what costs money when missed, because interest runs from a date already past by the time you notice.
Which units will actually go. The oldest ones, under first in first out, which decides both the holding period and any exit load. That mechanism is set out in partial withdrawal. The same applies to each leg of a systematic transfer plan, where every transfer out is a redemption in its own right.
What the gain will be, not what the proceeds will be. Your capital gains statement from the registrar gives cost against value.
Whether the timing matters. A redemption shortly before a holding period completes can change the rate applied. A few days of patience is sometimes worth more than the exit load.
Whether an instalment falls due. The one that follows the redemption, not the next return you file.
Common Questions
No. No income tax is withheld from the gain. Securities transaction tax of 0.001% is deducted on equity-oriented redemptions, and exit load where it applies, but the tax on your gain is not collected at source. It is still payable.
They are describing the provision formerly numbered Section 194K, which applies to income distributed on units, not to capital gains on redemption. The two are often run together. A growth option attracts no deduction at all while you hold it.
No. There is no threshold above which a resident’s redemption starts attracting TDS. A ₹50,000 redemption and a ₹50 lakh redemption are treated the same way for withholding.
Yes. Section 393(2), Table Sl. No. 10 covers income on mutual fund units paid to a non-resident, with no threshold, and sets the deduction at 20%, or at a lower treaty rate where the payee has furnished what the treaty requires. The withheld figure is not the final tax: what is actually owed is worked out on the return under the capital gains rules for the scheme and holding period, and the two are reconciled when you file.
Ten per cent once distributions from that fund house cross ₹10,000 in a financial year, and 20% where no PAN is on the folio. The threshold was ₹5,000 until 1 April 2025.
Those statements carry tax deducted, so a resident’s redemption with nil withholding has nothing to show there. Note that the name changed: the annual tax statement is Form 168 from tax year 2026-27 onwards, and Form 26AS applies to earlier years. The transaction itself is reported into the Annual Information Statement, which is a different document with a wider scope. Reconcile that against the capital gains statement from your registrar, because it shows value rather than gain.
The statute directs no deduction where the income is capital gain, so a fund house has no basis to withhold on a resident’s redemption. Plan to pay the instalment yourself rather than expecting it to be handled for you.
A switch is a redemption of one scheme and a purchase of another, so the same answer applies: nothing is withheld from a resident, and the gain on the scheme you left is taxable even though no money reached your bank.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.