Section 194: TDS on Dividends: In India, Section 194 of the Income Tax Act mandates that companies must deduct Tax Deducted at Source (TDS) on dividend payments made to their resident shareholders. This rule is primarily applicable to dividends from equity shares.
Let’s explore the latest updates, rates, and conditions for TDS on dividends under Section 194.
TDS on Dividend Payments: Key Highlights
TDS Deduction Requirement
If a company pays dividends to resident shareholders, it is required to deduct TDS before making the payment. The deduction should happen when the payment is made or credited, whichever occurs first.
TDS Rate for Dividends
- 10% TDS Rate: A 10% tax will be deducted if the dividend amount exceeds ₹10,000 in a financial year.
- 20% for Non-PAN Holders: If the shareholder hasn’t provided their Permanent Account Number (PAN), the TDS rate increases to 20%.
Threshold Limit Increased
Previously, TDS was deducted if the total dividend amount exceeded ₹5,000 in a year. However, this threshold has been increased to ₹10,000, meaning no TDS will be deducted if the dividend does not exceed this limit.
Who Needs to Deduct TDS?
- Deductors: Domestic companies paying dividends to resident shareholders.
- Deductees: Shareholders who receive dividend income from equity shares.
TDS Rates for Different Scenarios
Standard TDS Rate:
TDS will be deducted at 10% if the dividend exceeds ₹10,000 in a financial year, provided the shareholder has shared their PAN details.
TDS for Non-PAN Holders:
If the shareholder has not submitted their PAN, TDS is deducted at 20%.
Exceptions to TDS Deduction
- Small Dividend Payments: If the total dividend amount in a year is less than ₹10,000, no TDS will be deducted.
- Dividend Paid in Non-Cash Form: TDS is not deducted if the dividend is paid through modes other than cash.
- Specific Entities Exempted: Entities like the Life Insurance Corporation (LIC), General Insurance Corporation (GIC), and other insurance companies are exempt from TDS on dividends related to shares they own or beneficially hold.
How to Avoid TDS Deduction?
If your income is below the taxable limit, you can avoid TDS deduction by submitting Form 15G (for individuals below 60 years) or Form 15H (for senior citizens). This declaration ensures that no TDS is deducted on your dividend income.
Example of TDS Deduction on Dividends
Scenario: A shareholder receives a dividend of ₹10,000 from a company.
- If PAN is provided, TDS @ 10% = ₹1,000.
- Net amount received by the shareholder = ₹9,000.
The gross dividend of ₹10,000 must be included in the shareholder’s total taxable income, and the TDS amount can be claimed while filing the income tax return.
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Frequently Asked Questions (FAQs)
Does Section 194 apply to non-resident shareholders?
No, Section 194 only applies to resident shareholders. For non-residents, TDS on dividends is governed by Section 195, and the applicable rate may vary depending on Double Taxation Avoidance Agreements (DTAAs).
How do I claim TDS credit?
You can claim the TDS credit while filing your income tax return. The deducted amount will be reflected in your Form 26AS or AIS (Annual Information Statement), and you should include the gross dividend amount in your taxable income.
Are there any exemptions from TDS on dividends?
Yes, dividends that fall under Section 10(34) (exempt income) are not subject to TDS. Also, specific entities like LIC, GIC, or other specified institutions may qualify for TDS exemption under certain conditions.
What is the due date for depositing TDS?
The company or deductor must deposit the TDS with the government by the 7th of the next month. For March deductions, the due date is April 30.