Tax Deducted at Source (TDS) — NRI & Resident Rules
Tax deducted at source (TDS) is tax a fund house holds back from a payment and deposits with the government for the investor. This lesson sets out when it applies to residents and non-residents and how it is adjusted later, as of October 2026.
What TDS is and is not
Tax deducted at source collects tax at the moment a payment is made. The fund house holds back part of the payment, deposits it with the government on the investor's behalf, and issues a TDS certificate for the amount.
TDS is not a final tax. The investor's actual liability is worked out in the income-tax return, and the tax already deducted is adjusted against it. If more was deducted than is finally due, the excess can be claimed back by filing the return.
Resident investors
For a resident investor TDS applies only to IDCW. The fund house deducts 10% when the IDCW it pays to the investor exceeds ₹10,000 in a year, under section 393 of the Income-tax Act, 2025 (Section 194K of the old 1961 Act). If PAN is not furnished the rate is 20%, under section 397 (old Section 206AA).
No TDS is deducted on a resident's redemption gains. That does not make the gain tax-free: the investor works out the capital gain and pays the tax through the return.
Non-resident investors
For a non-resident, tax is deducted on both kinds of payment. On IDCW the rate is 20%, under section 393 (Section 196A of the old Act).
On redemption, tax is deducted at the capital-gains rate that applies to the gain. For equity-oriented units that is 20% on short-term gains (units held 12 months or less) and 12.5% on long-term gains (held more than 12 months). For specified mutual fund units bought on or after 1 April 2023, every gain is short-term and taxed at the slab rate.
Surcharge, where it applies, and cess are added to these base rates.
Tax treaties
A Double Taxation Avoidance Agreement is a tax treaty between India and another country, provided for in section 159 of the Income-tax Act, 2025 (old Section 90). Its general purpose is to prevent the same income being taxed twice, usually by letting tax paid in India be credited against tax in the country of residence.
A treaty does not give every non-resident a general exemption from Indian tax. The actual relief depends on the particular treaty.
Rules at a glance
Two fund houses, one limit each (illustrative)
Arjun, a resident who has furnished PAN, receives IDCW of ₹8,000 from one fund house and ₹7,000 from another in the same year. Neither has paid him more than ₹10,000, so neither deducts tax.
The whole ₹15,000 is still added to his income and taxed at his slab rate. He also redeems units at a gain that year; no tax is deducted on that either.
Working out the tax deducted (illustrative)
- Assumed figures, for arithmetic only. A resident with PAN receives IDCW of ₹24,000 from one fund house in a year. Tax deducted = ₹24,000 × 10% = ₹2,400, and the investor receives ₹21,600.
- If PAN had not been furnished: ₹24,000 × 20% = ₹4,800.
- A non-resident receiving the same IDCW: ₹24,000 × 20% = ₹4,800, before surcharge and cess.
- A non-resident redeems equity-oriented units held 8 months at a gain of ₹3,00,000. The gain is short-term: ₹3,00,000 × 20% = ₹60,000, before surcharge and cess.
- In the return, suppose the resident in the first step is taxed on the ₹24,000 at an assumed slab rate of 5%: tax = ₹1,200. The ₹2,400 deducted exceeds this by ₹1,200, which can be claimed back. Cess is ignored.
Result. The deduction is ₹2,400 with PAN, ₹4,800 without PAN or for a non-resident, and ₹60,000 on the non-resident's short-term gain.
Key points
- TDS is held back by the fund house, deposited for the investor and adjusted against the final tax in the return.
- For residents, TDS applies only to IDCW: 10% when the amount from a fund house exceeds ₹10,000 in a year (as of October 2026).
- No TDS is deducted on a resident's redemption gains; the tax is paid through the return.
- For non-residents, TDS is 20% on IDCW and is also deducted on redemption at the capital-gains rate.
Common misunderstandings
- TDS is not the final tax: it is adjusted against the tax worked out in the return, and any excess can be claimed back.
- No TDS on a resident's redemption does not mean no tax: the capital gain is still taxable through the return.
- A tax treaty is not a blanket exemption for non-residents: the relief depends on the particular treaty.
Questions people ask
Is tax deducted when a resident redeems units at a profit?
No. For residents, TDS applies only to IDCW above ₹10,000 from a fund house in a year.
Why can the amount deducted from a non-resident be more than 20% or 12.5%?
Because surcharge, where it applies, and cess are added to the base rate.
How does an investor show that tax was deducted?
The fund house issues a TDS certificate for the tax it deducts.
What this lesson relies on
- Income-tax Act, 2025 — section 393 (tax deducted at source on income from mutual fund units), section 397 (PAN not furnished), section 159 (agreements with other countries), sections 196 and 198 (capital-gains rates)
- Fund-house tax reckoners for financial year 2026-27 (secondary source for rates and limits)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.