ITR Filing FY 2023-24 (AY 2024-25) live

File your ITR Hassle-Free and Maximise your Refunds

File Today
  • TrustedTrusted by 1 Million+ Users
  • User Rating4.8 Star User Rating
  • SecureAuthorized by Tax Department
ITR Filing
linkedin
whatsapp

Section 194 of Income Tax Act - TDS on Payment of Dividend

Updated on: 16 Jan, 2024 05:49 PM

Finance Act 2020 has amended the provisions of section 194 of the Income Tax Act, 1961. Now, it provides for TDS on Dividend income declared, distributed, and paid by a domestic company which was earlier exempt from income tax under section 10(34). This is subsequent to the abolishment of DDT (dividend distribution tax) on the dividend amount declared by a domestic company. Let us understand section 194 for better compliance.

Section 194 of the Income-tax Act makes it mandatory for the principal officers of an Indian company who has made arrangements for declaring or paying deemed dividends in India to deduct tax at source before remitting the dividend amount to the shareholder at a prior rate.

Contents

What is TDS on Dividend Under Section 194?

Under section 194, the dividend received on equity shares is taxable at the applicable slab rates. The income is taxable in the hands of the receiver, and TDS is applicable. The company paying dividends has to deduct TDS under section 194 @10% if the shareholder’s total dividend in a year is more than Rs.5000 and is applicable from 1st April 2020 onwards.

What are the requirements to deduct TDS under section 194?

A principal officer of a company, which is in the process of declaring dividends (equity or preference or both) in India, is required to deduct tax on dividends covered in the sub-clause (a) or (b) or (c) or (d) or (e) of clause 22 of section 2.

What is the tax rate of TDS u/s 194?

  • TDS is deducted at 10% under section 194 if the dividend amount is more than 5000 in a year. TDS is deducted at the time of making payment or credit, whichever is earlier. Payment can be made via cheque, draft, or online.
  • If the payee does not provide a PAN number, TDS has to be deducted at 20%.

What are the exceptions to TDS deduction under section 194?

No tax deduction will be made u/s 194 in the case of the shareholder (who is an individual) when:

  • The dividend is covered under section 115-O.
  • The dividend is paid to LIC, GIC, or its subsidiaries or to any other insurer in respect of the shares that are owned by them or in which they have full beneficial interest.
  • If you have submitted Form I5G/15H as your income is below the taxable limit.

Time Limit to Deposit TDS Collected

The TDS collected by the company has to deposit the amount of TDS deducted, with the government. Here’s the deadline for depositing the same -

  • The tax withheld from April to February has to be deposited with the government by the 7th of the following month. Any delay in such a deposit might lead to penalties.
  • The taxes for March should be paid by April 30th or earlier.

What is Section 2(22)(a) or (b) or (c) or (d) of Income tax act?

What is Section 2(22)(a)- Distribution of Assets Deemed as Dividend?

  • It includes the distribution of accumulated profits made by a company, whether capitalized or not.
  • If such distribution of dividends involves the release of all assets or a part of the assets to the shareholders by the company.

Accumulated profits: Company’s all profits up to the date of distribution

All profits of the company in the form of current business profits, tax-free incomes, general reserve, investment allowance reserve, etc.

It does not include revaluation reserve and depreciation reserve.

Section 2(22)(b)- Distribution of Debentures etc. Deemed as Dividend

If any amount is distributed by the company to its shareholders, dividend includes -

  • Debenture, debenture stock, or deposit certificates of any form, with interest or without interest to equity shareholders or preference shareholders.
  • Bonus shares distribution to preference shareholders.
  • The extent to which a company possesses accumulated profits, whether capitalized or not.

Section 2(22)(C)- Distribution of Assets on Liquidation Deemed as Dividend

Any amount distributed by the company to its shareholders on its liquidation -

  • To the extent where such distribution can be attributed to the accumulated profits of the company right before its liquidation, whether capitalized or not. However, any amount distributed from the company’s profits after its liquidation cannot be considered a dividend.
  • When liquidation happens due to the compulsory acquisition by the government, the accumulated profits do not include the company’s profits before 3 consecutive previous years preceding the previous year when the acquisition took place.

Section 2(22)(d)- Distribution on Reduction of Share Capital Deemed as Dividend

A dividend includes any distribution to its shareholders by a company on the reduction of its capital to the extent to which the company possesses accumulated profits, whether capitalized or not, is deemed as a dividend.

Section 2(22)(e)- Loans & Advances by Closely held Company Deemed as Dividend

Dividend Includes: Any payment by a company not being a company in which the public is substantially interested of any sum by way of loan or advance to be-

  1. A shareholder is the beneficial owner of shares
  2. Holding not less than 10% of the voting power
 Deemed as the dividend in the hands of the shareholder
or
  1. to any concern
  2. in which such a shareholder for at least 10% of the company’s equity capital
  3. is a member or a partner
  4. and in which he has a substantial interest of minimum 20%
 Deemed as the dividend in the hands of concern
or
  1. to any person
  2. On behalf of or for the individual benefit of such a shareholder
 Deemed as a Dividend in the hands of the shareholders

Understanding the intricacies involved in each section of the Income Tax Act can be quite intimidating for laymen. If you are also among those who feel all confused just thinking about taxes and don’t know how to go about filing your TDS return, you can take professional help.

Tax2win’s eCAs are highly qualified and always on their toes to help you simplify your taxes.

Hire an eCA from Tax2win Now!

Frequently Asked Questions

Q- Can I get credit for TDS tds deducted, though it is not shown in 26AS? If yes, how?

If Form 26AS is not showing the deduction of TDS on your income, then the deductor has not deposited it with the government. In this condition, you are required to ask the deductor to pay the same to the government and file a TDS return.

Q- What is the threshold limit for the tax under section 194A?

There is no deduction upto Rs. 5000 if the dividend is paid by any mode other than cash.

Looking for Tax Help

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.