Small RNAs regulate chromatin modification and transcriptional gene silencing across the eukaryotic kingdom. Although these processes have been well studied, fundamental mechanistic aspects remain obscure. Specifically, it is unclear exactly how small RNA-loaded Argonaute protein complexes target chromatin to mediate silencing. Here, using fission yeast, we demonstrate that transcription of the target locus is essential for RNA-directed formation of heterochromatin. However, high transcriptional activity is inhibitory; thus, a transcriptional window exists that is optimal for silencing. We further found that pre-mRNA splicing is compatible with RNA-directed heterochromatin formation. However, the kinetics of pre-mRNA processing is critical. Introns close to the 5' end of a transcript that are rapidly spliced result in a bistable response whereby the target either remains euchromatic or becomes fully silenced. Together, our results discount siRNA-DNA base pairing in RNA-mediated heterochromatin formation, and the mechanistic insights further reveal guiding paradigms for the design of small RNA-directed chromatin silencing studies in multicellular organisms.