Let us say you have invested Rs 10 lakh in a mutual fund. You receive a periodic dividend of Rs 10,000. At maturity, you will get the entire Rs 10 lakh. Since TDS deduction applies to mutual fund investments, the mutual fund company will deduct the tax amount before it pays you . Assuming a tax rate of 10 per cent, you will receive Rs 9,000 (net of TDS) as dividend during each period. On maturity of the fund, you will receive Rs 9,00,000, after deducting tds. The fund will transfer to the government all the deductions made. You will not have to pay any taxes on this later on. In fact, you could claim tax credit for the deducted amount when you file your income tax return.