Section 194 of Income Tax Act - TDS on payment of dividend

Introduction

Section 194 of the Income Tax Act deals with the Tax Deducted at Source (TDS) on dividend income. If a company or mutual fund is paying a dividend to its shareholders, it is required to deduct tax before disbursing the amount. This section aims to ensure that tax is deducted at the source of income and deposited directly with the Income Tax Department. In FY 2025-26, the taxability of dividend income has undergone certain revisions as per the Budget 2025. In this guide, we will explain TDS on dividend income, exemptions, threshold limits, deduction procedures, and other key details.

What is Section 194?

Section 194 mandates the deduction of tax at source (TDS) on dividends paid by companies or mutual funds to their shareholders. The provision is applicable to both individuals and corporations that receive dividend payments exceeding the prescribed threshold limit.

Key Features of Section 194:

1. Scope: This section applies to dividends paid by a domestic company or mutual funds to their shareholders or unit holders.
2. TDS Deduction: The company or mutual fund that is paying the dividend is required to deduct tax at the applicable rate before paying the dividend to the recipient.
3. Tax Payment: The deducted TDS is then deposited with the government, and a TDS certificate (Form 16A) is provided to the recipient as proof of the deduction.
4. Applicability: Section 194 applies only if the total dividend payment exceeds the threshold limit prescribed by the government.

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Old v/s New Provision for Taxability of Dividend Income

Before April 1, 2020 (old rule), the tax on dividends was mainly paid by the company, not the shareholder. This was called Dividend Distribution Tax (DDT), and the dividend you received was mostly tax-free in your hands.

Feature

Old Rule (Before April 1, 2020)

New Rule (Applicable for FY 2025-26)

Who Pays Tax?

The Company paid DDT.

The Shareholder pays the tax.

Taxability for You

The dividend was generally tax-free in your hands.

Dividend is added to your total income and taxed at your normal Income Tax Slab Rate.

TDS under Sec 194

Generally, no TDS under Section 194 was required (as tax was already paid by the company).

Yes, the company must deduct TDS under Section 194 if the dividend amount goes above the limit.

TDS Limit (Threshold)

Not Applicable.

The threshold has been increased to ₹10,000 (from the old limit of ₹5,000) for resident individuals from FY 2025-26.

Dividend income is now fully taxable in your hands, and the company giving the dividend must deduct TDS if the amount is more than the limit. The increase in the limit to ₹10,000 from FY 2025-26 means more small investors will get the full dividend amount without any TDS cut.

TDS on Dividend Income

TDS stands for Tax Deducted at Source. When a company gives out a dividend, it is required to deduct tax from the payment before giving it to you, the shareholder, if certain conditions are met. This is done under Section 194.

• For Resident Shareholders: If the total dividend paid by an Indian company to a resident individual in a financial year is more than ₹10,000 (this is the new limit from FY 2025-26), the company has to deduct TDS.
• The Rate: The company will cut tax at a rate of 10%.
• If you don't have a PAN: If you do not give your Permanent Account Number (PAN) to the company, or if your PAN is inactive, the TDS rate will be much higher, usually 20%.

Deduction of Expenses from Dividend Income

As per the Finance Act 2020, the interest expense incurred against the dividend income is deductible from the income. The deduction should not exceed 20% of the dividend income received. However, apart from this, you cannot claim a deduction for any commission or salary expense incurred for earning the dividend.

Who is responsible for deducting tax under Section 194?

Who is the Deductor?

• The Indian Company paying the dividend is responsible for deducting the tax (TDS).
• Specifically, the Principal Officer of the company is responsible for ensuring this tax is deducted.

Company's Main Duties:

1. Check Limit: Verify if the total dividend paid to a resident shareholder is more than ₹10,000 in the Financial Year 2025-26.
2. Deduct Tax: Cut tax at the rate of 10% if the amount is above the limit.
3. Deposit: Deposit the deducted TDS with the Central Government.
4. Issue Form: Give the shareholder a TDS Certificate (Form 16A) to claim tax credit.

Threshold Limit under Section 194

What is the Limit?

The 'threshold limit' is the minimum amount of dividend income that triggers the need for TDS deduction.

For Financial Year 2025-26:

• The limit is ₹10,000 for resident individuals.

What it means:

• Dividend ₹10,000 or less: NO TDS is deducted.
• Dividend more than ₹10,000: TDS at 10% is deducted on the entire dividend amount.

When to Deduct TDS under Section 194?

TDS must be deducted at the time of payment or crediting the dividend to the recipient’s account, whichever happens first.

Key Points:

1. Timing: TDS is deducted when a dividend is paid (whether in cash, cheque, or kind) or when it is credited to the recipient’s account.
2. Advance Payment: If the payment is made in advance, TDS is still applicable at the time of crediting the amount.

Rate of TDS under Section 194

For the Financial Year 2025-26, the standard rates are:

Shareholder Status

Rate of TDS

Conditions

Resident Individual / HUF

10%

If the total dividend is more than ₹10,000 in the financial year.

All Other Resident Shareholders (Company, Firm, etc.)

10%

TDS is applicable on the entire dividend amount (no ₹10,000 limit).

If PAN is Missing or Inoperative

20%

This is a higher penalty rate applicable to all resident payees who do not provide a valid PAN to the company.

Other Points

You can avoid the 10% TDS on dividends if your total tax payable for the year is zero. This is done by submitting a declaration form to the company.

Form

Who Can Submit?

Form 15G

Resident Individuals and HUFs below 60 years of age.

Form 15H

Resident Senior Citizens (60 years or older).

Key Conditions:

1. Nil Tax Liability: Your calculated total tax for the entire financial year must be zero.
2. Specific Limit (for 15G only): Your total income must also be less than the basic tax-free income limit for the year.

When to Submit:

• Submit the form to the company at the start of the financial year (April) or before the dividend is paid.
• A new form must be submitted every financial year.

Advance Tax on Dividend Income

Advance Tax is paying your income tax in installments throughout the year instead of all at once when filing your ITR.

Key Rules:

• When to Pay: You must pay Advance Tax if your total estimated tax liability (after considering any TDS already cut) is ₹10,000 or more.
• Dividend Inclusion: You must include your expected dividend income when calculating your total Advance Tax.
• TDS Benefit: The 10% TDS already deducted by the company counts as a payment of Advance Tax, so you only pay the remaining balance.
• Installment Dates: Payments are due on the 15th of June, September, December, and March. Missing these can lead to interest charges.

Dividend Received From Foreign Company

Tax Rules:

• Taxable in India: Dividend from a foreign company is fully taxable in your hands in India at your normal income tax slab rate.
• No Section 194 TDS: The foreign company does not deduct tax under India's Section 194.
• Foreign Tax Credit (FTC): If the foreign company deducted tax in their country, you might be able to claim a credit for it in India (FTC), often based on the Double Taxation Avoidance Agreement (DTAA).

Conclusion

Section 194 ensures that TDS on dividend payments is collected at source, simplifying tax collection for the government. The Budget 2025 updates introduced certain revisions to improve tax compliance and make the process more transparent. Understanding Section 194, its rates, exemptions, and compliance requirements is essential for individuals and businesses involved in receiving or paying dividends.