Section 194 – TDS on Dividend Income

The Finance Act, 2020 brought significant changes to the taxation of dividend income by amending Section 194 of the Income Tax Act, 1961. Prior to this amendment, dividend income was exempt under Section 10(34) as companies were liable to pay Dividend Distribution Tax (DDT). However, with the removal of DDT, the responsibility to pay tax on dividend income shifted to the recipients. Consequently, domestic companies are now required to deduct TDS (Tax Deducted at Source) on dividend payments made to shareholders.

Key Provisions of TDS under Section 194

1. Time of Deduction:

   Tax must be deducted at source before making the dividend payment to the shareholder.

2. Person Responsible to Deduct TDS

   The obligation lies with the principal officer of a domestic company that makes arrangements for the declaration or payment of any dividend, including on preference shares.

3. Payee / Deductee

   The tax is to be deducted when the dividend is paid to a resident shareholder.

4. TDS Rate

   A flat 10% TDS is applicable on dividend amounts exceeding the threshold limit.

5. Threshold Limit (Updated)

   The TDS applicability depends on the total dividend paid or credited during the financial year:

Period	TDS Rate	Threshold Limit
Before 01 April 2025	10%	₹5,000
On or after 01 April 2025	10%	₹10,000

6. Note: If the shareholder does not furnish their PAN, TDS will be deducted at a higher rate as per Section 206AA.

7. Exemptions from TDS under Section 194

   TDS is not required in the following cases:

   • If the shareholder submits a valid Form 15G or 15H, as applicable.

   • Dividend payments made to specified insurance companies, mutual funds, and Alternative Investment Funds (AIFs) notified under the Income Tax Act.

     
     

Explore our next topic on TDS under Section 194A, which covers interest payments other than "Interest on securities." Read on to learn more!