Easiest way to e-file your Income Tax Return!

  • Trusted by 2 Million+ Users 1+ Million Users
  • Secure & Safe Secure & Safe
  • 4.8 Star User Rating 4.8 Star Rating
Upload Form 16 File ITR For Free Or
Book eCA Now Lowest Tax Filing Fees in India
cta user img

What Is Section 194 Under Income Tax Act?

Updated on: 03 Aug, 2022 06:03 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 compliances.

Important: e-verify your income tax return within 30 days, else your return will be considered as not filed.

What is TDS on Dividend Under Section 194?

All of us love “dividends”. Many of us, our friends, relatives etc buy shares of big companies with the aim to earn good returns in the form of share price hikes as well as dividends. The dividend is simply an equity (and preference) shareholders profit share in the company and section 194 calls for the deduction of tax on such dividend income given to shareholders.


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 dividend covered in the sub-clause (a) or (b) or (c) or (d) or (e) of clause 22 of section 2. But from 1.4.2003, this provision of TDS will only be applicable on dividend as per section 2(22)(e) as dividends covered u/s 2(22)(a) or (b) or (c) or (d) are exempt in the hands of the shareholders.


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

The rate under this section is 10%. TDS will be deducted at time of payment(via cash, cheque, draft etc) or credit, whichever is earlier.


What are the exceptions to TDS deduction under section 194?

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

  • The dividend is paid by way of account payee cheque & such amount (alone or aggregate during financial year) does not exceed Rs.2500.
  • 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 a full beneficial interest.
  • If you have submitted Form I5G/15H as your income is below the taxable limit.

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

Section 2 subsection 22 deals with the definition of dividends as per the income tax act.

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

Dividend includes any distribution by a company of accumulated profits, whether capitalized or not if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company.


Section 2(220(b)- Distribution of Debentures etc. Deemed as Dividend

Dividend includes
  • Any distribution to its shareholders by a company of debentures, debenture-stock or deposit certificates in any form, whether with or without interest and
  • Any distribution to its preference shareholders of shares by way of bonus

To the extent to which the company possesses accumulated profits, whether capitalized or not.

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

Dividend includes any distribution made to the shareholders of a company on its liquidation, to the extent to which such distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not.


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

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.


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 public are 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
  3. is a member or a partner
  4. and in which he has a substantial interest
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 Dividend in the hands of the shareholders

Frequently Asked Questions

Q- Is TDS deducted on interest paid to the bank?

Yes, TDS is deducted at the rate of 10% of the interest earned from the bank, if the interest income is more than Rs 10,000 in a year, however, Budget 2019 has increased this threshold to INR 40000. If the account holder has not submitted his or her PAN details, the rate of Tax deduction at source by the bank will be 20% of the interest charged.


Q- Is TDS applicable on EMI of loan?

NO, TDS is not applicable on EMI loans in case interest is paid to banks.. TDS is only required to be deducted if interest on loan is paid to other parties.


Q- Is TDS applicable on saving account interest?

Yes, Tax deduction at Source is applicable on interest earned from savings accounts. The income from interest must exceed the limit of Rs 40,000 (As amended in Budget 2019) to deduct TDS at the rate of 10%.


Q- Is TDS deducted on interest on loan?

Yes, tax deduction at source is applicable when interest is paid by others on loan at the rate of 10%.


Q- Who is required to deduct TDS on interest?

The person or a company who pays the interest amount, deducts tax deduction at source before releasing the payment.


Q- Is there any TDS deduction on the interest earned from the savings bank account or is it applicable for fixed deposits only?

Yes, the Tax deduction at Source is applicable on interest earned from the savings accounts. The income from interest must exceed the limit of Rs 10,000 to deduct TDS at the rate of 10%.


Q- I had not deducted TDS on purchase of a flat and paid the builder in full. Now the builder is asking me to pay TDS from my pocket. How should I handle this situation?

This is the duty of the buyer to apply tax deduction at source and deduct at the rate of 1% from the seller's amount. If you fail to do so, you can either pay TDS to the Government from your pocket and add to your cost of the flat. Otherwise you can pay TDS to the Government from your pocket and claim for a refund from your seller showing Form 26QB.


Q- How do I claim a previous year TDS refund if the ITR is not filed for that year and doesn't pay the income tax?

If an individual wants to claim TDS of the previous year he or she has to file an income tax return for that year. Even if the income is not taxable, if TDS is deducted from your income, you have to file ITR to get a refund of your TDS amount.


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 TDS return.


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

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


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.

X

Important!!!

Income Tax Notice

Received An Income Tax Notice?

Contact now