Water retention in transglutaminase (TG)-treated acid milk gels was studied and linked with the gel formation dynamics. Heat-treated skim milk with and without pre-treatment by TG was acidified at 20 °C, 30 °C and 40 °C at constant glucono-δ-lactone (GDL) level to obtain different acidification rates. Formation dynamics and structural properties of acid-induced gels were followed by rheological and near-infrared light backscattering measurements as well as microscopy. TG-treated gels showed decreased tan δ values all through the acidification, which was pronounced around the gelation point. Backscattered light intensity was lowered in TG-treated gels compared to the controls indicating that TG-treated gels were comprised of smaller aggregates. Water holding capacity (WHC) was measured by using centrifugation at selected pH points (pH 5.2, 5.0, 4.8 and 4.6) during acidification. Both acidification temperature and TG treatment had significant effects on the water retention properties of the gels. Spontaneous syneresis observed at high acidification temperatures (≥30 °C) was prevented upon TG-treatment. WHC of TG-treated gels was significantly higher compared to the control gels at all pH points. TG-treated milk gels showed a homogeneous network formed of smaller aggregate and pore sizes at the gelation point and did not show any large-scale re-organisation thereafter. Transglutaminase is likely to act as a fixative of the protein network at an early stage of gelation and thereby limiting network rearrangements that take place in acid milk gels formed at high acidification temperatures leading to contraction and subsequent wheying off.