Section 10(35) Mutual Fund Income Exemption: Old Rules and Current Tax Treatment
Section 10(35) of the Income-tax Act, 1961 historically exempted certain income received from specified mutual fund units and specified undertakings or companies. This exemption no longer applies generally to mutual fund distributions received on or after 1 April 2020. Investors must distinguish taxable fund distributions from capital gains on redemption or sale.
What did section 10(35) provide?
Under the Income-tax Act, 1961, section 10(35) dealt with income received in respect of units of specified mutual funds and certain specified undertakings or companies, subject to the conditions and exceptions in the legislation. It was distinct from income arising on transfer of units, such as redemption or sale, which was outside the scope of that exemption.
Historically, eligible recipients could include any assessee, provided the receipt and the units met the statutory requirements. The provision did not establish a blanket exemption for every form of return from a mutual fund.
Historical eligibility, income and exemption
| Topic | Historical section 10(35) treatment |
|---|---|
| Eligible assessee | Any assessee receiving qualifying income from specified units |
| Nature of income | Qualifying income in respect of units of specified mutual funds, specified undertakings or specified companies |
| Exemption amount | The whole of qualifying income while the exemption was operative for the relevant receipt |
| Excluded receipts | Income arising from the transfer, redemption or sale of units was not covered by section 10(35) |
| Present-day position | Mutual fund income distributions are generally taxable in the investor's hands under applicable law |
Why did the mutual fund dividend exemption change?
Before the 2020 reforms, distributions from specified mutual funds could benefit from the exemption in section 10(35), while a separate distribution tax regime applied at fund level in relevant cases. The Finance Act, 2020 shifted taxation of these distributions to investors and restricted the historical exemption for income received on or after 1 April 2020.
Consequently, a mutual fund's income distribution (often called an IDCW payout, for Income Distribution cum Capital Withdrawal) is generally included in the investor's taxable income. The applicable tax rate depends on the recipient's status and other provisions. Tax deduction at source may apply subject to statutory thresholds and conditions; TDS is not necessarily the final tax liability.
Income distributions versus capital gains
Mutual fund returns are not all taxed in the same way. An IDCW payout is generally treated as income, whereas a gain arising on redemption or sale is generally evaluated under the capital gains provisions, including rules concerning the type of fund, date of acquisition, holding period and applicable tax year.
The taxation of specified mutual funds, including debt-oriented funds, has changed through subsequent Finance Acts. A historical exemption under section 10(35) should not be used to determine the capital gains treatment of a current redemption. Review the current statute and any transitional rules for the specific investment.
Income-tax Act, 2025: how to read the current law
The Income-tax Act, 2025, as amended by the Finance Act, 2026 is the principal legislation for tax years beginning on or after 1 April 2026. References to section 10(35) identify the former Income-tax Act, 1961 and are particularly relevant to historical assessments and pre-2020 distributions.
For current receipts, check the applicable charging, income classification, capital gains and withholding provisions under the 2025 Act rather than assuming that the former section number or exemption applies unchanged.
Illustrative tax situations
- Mutual fund IDCW payout in 2026: Generally taxable to the investor under the applicable rules; not exempt merely because the units are of a mutual fund.
- Sale of mutual fund units: Assess any capital gain or loss under the relevant capital gains rules. The former section 10(35) did not exempt transfer gains.
- Qualifying distribution received before 1 April 2020: The historical exemption may be relevant, subject to the exact statutory wording, date and type of units.
- Return of capital or other special receipt: Characterisation depends on the scheme documents and applicable tax provisions; do not assume every payment described as a distribution has identical treatment.
Documents investors should retain
- Mutual fund account statements and scheme information documents.
- Distribution statements showing payment dates and amounts.
- Purchase and redemption confirmations and cost details.
- Annual information statement (AIS), Form 26AS and TDS certificates, where applicable.
- Capital gains statements and supporting tax computations.
Official legislation and related guidance
- Income Tax Department: legislation and guidance
- Income-tax Act, 2025, as amended by Finance Act, 2026
- India Code: statutory texts and amendments
- Income Tax e-Filing portal
- Section 10 exemptions: related article
- Guide to tax-exempt income
- Chapter VI-A deductions
Frequently asked questions
Is mutual fund dividend or IDCW income exempt under section 10(35) today?
No. The historical exemption does not generally apply to mutual fund income distributions received on or after 1 April 2020. Such distributions are ordinarily taxable to investors.
Did section 10(35) exempt gains on selling mutual fund units?
No. Income arising from transfer of the units was excluded from the historical exemption. Capital gains rules apply separately.
Who could claim the former section 10(35) exemption?
Any assessee receiving income from units covered by the statutory provision could qualify, subject to the relevant dates, exclusions and conditions.
Does the Income-tax Act, 2025 retain the old section number?
No. Section 10(35) refers to the Income-tax Act, 1961. For tax years beginning on or after 1 April 2026, consult the provisions of the Income-tax Act, 2025.
This article is general information, not individual tax advice. Verify the legislation, scheme type and dates relevant to your transaction.