TDS on Mutual Fund Commission Section 194H Explained

TDS on Mutual Fund Commission: An Overview

TDS on mutual fund commission is one of the most misunderstood tax topics for new Mutual Fund Distributors (MFDs), and it is worth getting right because the wrong assumption costs both compliance headaches and money. Every AMC deducts Tax Deducted at Source (TDS) before paying commission to an MFD, at a rate defined under Section 194H of the Income Tax Act, 1961. The deducted amount appears in the MFD's Form 26AS and is claimed as a credit while filing the annual income tax return.

This guide covers the current TDS rate and threshold after the Budget 2024 and Budget 2025 changes, how the deduction actually works, the important ITR form choice most MFDs get wrong, and the practical steps to file returns cleanly as a mutual fund distributor. Working as a mutual fund distributor means treating tax compliance as a professional habit, not an annual scramble.

How TDS Works on MFD Commission

The TDS framework on MFD commission has changed materially over the past two years, and the current numbers are what matter.

Current TDS rate: 2 percent. Budget 2024 reduced the Section 194H TDS rate from 5 percent to 2 percent, effective October 1, 2024. This rate applies to commission and brokerage payments to residents, excluding insurance commission (which is under Section 194D separately). The 2 percent rate continues to apply through FY 2026-27.

Threshold for TDS deduction: ₹20,000 per financial year. Budget 2025 raised the threshold from ₹15,000 to ₹20,000, effective April 1, 2025. If the total commission paid by an AMC to an MFD in a financial year is ₹20,000 or less, no TDS is deducted. If it crosses the threshold, TDS is deducted on the full commission amount, not just the excess.

If PAN is not provided: 20 percent. Under Section 206AA, if the MFD has not furnished a valid PAN to the AMC, TDS is deducted at 20 percent instead of the standard 2 percent. This is why keeping PAN details updated with every AMC matters materially.

TDS is calculated on the commission amount excluding GST. When GST is shown separately on the commission invoice, TDS applies to the commission component only, not the GST component. This is worth confirming with each AMC because incorrect deduction here is a common reconciliation issue.

Insurance commission is separate. Section 194H covers mutual fund commission and general brokerage. Insurance commission is governed by Section 194D at a different rate and threshold structure. MFDs who also distribute insurance need to track both frameworks separately.

The AMC deducts the TDS at source, deposits it with the government under the MFD's PAN, and issues Form 16A quarterly. The deducted amount appears in the MFD's Form 26AS and Annual Information Statement (AIS), both accessible from the Income Tax e-filing portal. The MFD claims this TDS as a credit against their tax liability when filing the annual return.

How to File ITR on MFD Commission Income

How to file ITR on MFD commission income is where most MFDs go wrong, because they assume the presumptive taxation scheme applies to them. It does not, and this is worth being explicit about.

The critical fact: MFDs cannot use ITR-4 (Sugam) or the presumptive taxation scheme. Commission and brokerage income is explicitly excluded from Section 44AD, the small-business presumptive scheme that allows income to be declared at 6 per cent or 8 per cent of turnover. Mutual fund distribution is also not a "specified profession" under Section 44ADA (which covers legal, medical, engineering, architectural, accounting, technical consultancy, interior decoration, and CBDT-notified professions). This means MFDs must file under the regular business income provisions.

The correct form: ITR-3. MFDs file ITR-3, which requires a Profit and Loss account and Balance Sheet, and reports commission income under the head "Profits and Gains from Business or Profession." Actual expenses (office rent, communication costs, travel, professional fees, technology subscriptions, depreciation on assets) are claimed against the commission income, and tax is paid on the net profit.

Key filing steps.

• Reconcile Form 26AS and AIS with your own commission records before starting the return. Any mismatch is worth resolving with the AMC before filing.

• Aggregate all commission income across every AMC you distribute for. This is your gross receipts number.

• Claim legitimate business expenses. Office costs, technology, professional development, travel to client meetings, and reasonable depreciation all reduce taxable income.

• Report other income separately. Salary from another role, capital gains, rental income all report under their respective heads.

• Choose the tax regime. Compare the old regime (with deductions) against the new regime (lower slabs but fewer deductions) for your specific numbers. The new regime is now the default from FY 2023-24 onwards.

• File by the deadline. For FY 2025-26 (AY 2026-27), the ITR-3 filing due date is 31 July 2026 for non-audit cases. If your turnover requires a tax audit under Section 44AB, the due date is 31 October 2026.

• E-verify within 30 days of filing; otherwise the return is treated as not filed.

Advance tax also applies if the total tax liability after TDS exceeds ₹10,000 in a financial year. Missing advance tax deadlines triggers interest under Sections 234B and 234C, which is worth avoiding.

Conclusion

TDS on mutual fund commission is straightforward once the current numbers are clear: 2 per cent under Section 194H, threshold ₹20,000 per financial year, 20 per cent if PAN is not furnished, and calculated excluding GST. The bigger and more commonly missed point is the ITR form choice. MFDs cannot use ITR-4 or the presumptive taxation scheme because commission and brokerage income is explicitly excluded from Section 44AD, and mutual fund distribution is not a specified profession under Section 44ADA. The correct form is ITR-3, filed under business income with legitimate expenses claimed against commission receipts. Getting this right from year one saves both compliance headaches and money.

Disclaimer: Tax rates, thresholds, and filing procedures reflect provisions current as of August 2026. From April 1, 2026, the Income Tax Act 2025 applies, with Section 194H mapped to a new consolidated payment code under Section 393. The substance of the TDS rate (2 percent) and threshold (₹20,000) is retained. MFDs should confirm current rates and deadlines with a qualified tax professional before filing. This article is guidance for practice building, not personalised tax advice.

© 2026 Wealthy. For educational purposes only. Not financial, legal, or regulatory advice. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.