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

Updated on: 20 Feb, 2025 11:43 AM

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.

Budget 2025 Update

  • The threshold for TDS on rent has been increased from Rs.2.4 lakhs per year to Rs.6 lakhs per year.
  • The threshold for TDS on senior citizen interest income has been increased from Rs.50,000 to Rs.1,00,000.

Contents

What is TDS on Dividend Under Section 194 of Income Tax Act?

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 However, this limit was revised in Budget 2025 and made Rs.10,000.

What are the requirements to deduct TDS under section 194?

The firms principal officer must deduct the tax on dividends at applicable rates of the company that has made arrangements to declare dividends within India.

  • Section 2(22)(a): Any distribution of accumulated profits by a company to its shareholders is considered a dividend, whether capitalized or not. This includes the release of company assets.
  • Section 2(22)(b): Issuing debentures, debenture-stock, or deposit certificates (with or without interest) is considered a dividend. Bonus shares given to preference shareholders also fall under this category.
  • Section 2(22)(c): When a company distributes profits during liquidation, it is considered a dividend if it represents accumulated profits, whether capitalized or not.
  • Section 2(22)(d): If a company reduces its capital and distributes profits to shareholders, it is treated as a dividend if the company has accumulated profits, whether capitalized or not.
  • Section 2(22)(e): Any payment made by a company (other than a publicly held one) in the form of loans or advances to shareholders or related persons is deemed a dividend if the public holds a substantial interest in the company.

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 10,000 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:

  • No TDS is deducted if the dividend is covered under section 115-O.
  • The total amount of dividend paid is not more than Rs.2500 and is paid by account payee cheque.
  • The dividend is paid to LIC, GIC, or its subsidiaries or to any other insurer with respect to the shares that are owned by them or in which they have a full beneficial interest.
  • Dividends paid to a business trust, as defined in clause (13A) of Section 2, by a special purpose vehicle referred to in the Explanation to clause (23FC) of Section 10, are exempt from TDS.
  • If you have submitted Form I5G/15H your income is below the taxable limit.
  • Any other person notified by the Central Government in the Official Gazette is also exempt from TDS deduction

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. If the due date falls on a Sunday or public holiday, the next working day is considered the last date for payment. 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, the 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 a minimum of 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

Form 15G

Under sub sections 1 and 1A of section 197 of the Income Tax Act, the individuals can declare certain receipts without deducting tax.

Form 15H

  • If the income is less than the taxable threshold, then the taxpayer can submit Form 15H to avoid TDS deduction.
  • This form is applicale to individuals 60 years of age or above.
  • Under section 197(1C) of the internal revenue Code, the individuals can file a declaration claiming specific receipts without deducting tax.

Adjustments of Short Deductions

Section 194A allows the taxpayers to increase or decrease the amount of deduction. This can be done by the person responsible for making payments to rectify the situation of deficiency or any excess deduction caused due to previous deduction or failure to deduct TDS throughout the fiscal year.

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 get professional help. Hire an eCA from Tax2win Now!

Frequently Asked Questions

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

If Form 26AS does not show 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.

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

TDS is also applicable on interest from savings bank account apart from FDs, if the interest earned exceeds Rs.10,000 at 10%.

Q- What is Section 194A of the Income Tax Act?

Section 194A covers the provision for TDS deduction on interest other than securities. It covers interest earned on recurring deposits, fixed deposits, unsecured loans and advances, etc.

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

Yes, you can get credit for TDS deducted even if it is not shown in 26AS. If the deduction is not shown in Form 26AS, it means that the deducted has not deposited the TDS to the government. In this case, you can ask them to pay the TDS and file the ITR.

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