Section 194 of Income Tax: TDS on Dividend

Companies paying dividends to their resident Indian customers are responsible to deduct TDS from this income under Section 194 of the income tax law. This rule is not applicable on business trusts and special purpose vehicles.

Table of Contents

See also: How TDS on securities interest is deducted under Section 193?

Who has to deduct TDS?

The company responsible for making this payment has to deduct tax at source under the TDS framework in which income is paid only after deducting taxes.

see also: 206ab of income tax act

Exemption under Section 194

No deduction under Section 194 will be made if the value of the dividend is up to Rs 5,000 unless it is paid in cash.
Section 115-O applies to dividends.
No deduction under Section 194 to payments made to specified insurance companies, mutual funds houses and alternative investment fund houses like LIC and GIC are exempted from TDS.
No TDS is to be deducted if the individual taxpayer’s income is below the taxable limit and they furnish Form 15G/Form 15H.

Rate of TDS under Section 194

The TDS rate is 10% of the income if the dividend amount is more than Rs 5,000. In case the person earning this income does not have a PAN card, the rate of deduction will double to 20%.

The TDS on payment for dividend was cut to 7.5% from 10% for an 11-mont period in 2020. The revised rates were applicable from May 14, 2020, to March 31, 2021.

When should the tax be deducted?

The tax must be deducted within the following timeless:

Before the cash payment of any dividend.
Before writing a dividend check or warrant.
Before giving a shareholder any payment or distribution of a dividend.

For TDS deducted from April to February, it must be deposited by the 7^th of the following month. March taxes must be paid by April 30.

FAQs

What is TDS?

TDS is tax deducted at the time of generation of income to curb tax evasion.

What is dividend?

Dividends are a part of a company’s profits that is paid to the people who own shares in it.

What is Section 194 threshold?

If a dividend is paid through a method other than cash, there is no deduction up to Rs 5,000.

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Sunita Mishra

An alumna of the Indian Institute of Mass Communication, Dhenkanal, Sunita Mishra brings over 16 years of expertise to the fields of legal matters, financial insights, and property market trends. Recognised for her ability to elucidate complex topics, her articles serve as a go-to resource for home buyers navigating intricate subjects. Through her extensive career, she has been associated with esteemed organisations like the Financial Express, Hindustan Times, Network18, All India Radio, and Business Standard.

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