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Section 194 of Income Tax Act – TDS on Dividend Income

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August 23, 2022

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11 mins read

Section 194 of Income Tax Act – TDS on Dividend Income

Serial No. Contents
1. Introduction of Section 194 of Income Tax Act
2. Who is liable to deduct TDS under Section 194 of the Income Tax Act, 1961?
3. Threshold Limits for deducting TDS u/s 194
4. Rate of Deduction of TDS in Dividend Income
5. TDS on Dividend Income paid to other entities
6. Exemption from TDS u/s 194
7. Verbatim of Section 194

Introduction of Section 194 if Income Tax Act

From April 1, 2020, dividend income is taxable in the hands of the recipient under the Income Tax Act, 1961 (hereinafter referred to as the “Act”). Dividend refers to profits distributed  by a company to its shareholders. Section 2(22) of the Act provides an exhaustive definition of the term “Dividend”. Section 194 of the Act has provided for the deduction of income tax at the source.

Who is liable to deduct TDS under Section 194 of the Income Tax Act, 1961?

According to the provisions of the Act, the principal officer of an Indian company or a company which has made the requisite arrangements for the declaration and payment of any dividend (including payment of dividend on preference shares) to a Resident shareholder is required to deduct income tax at the source. Such tax is to be deducted at a time before such dividend is paid to the shareholder.

Threshold Limits for deducting TDS under section 194 of Income Tax Act

The Government has prescribed an aggregate limit of Rs. 5000 during the financial year, below which no Income Tax needs to be deducted by the company. However, this condition holds true only if mode of payment of dividend is not cash. Furthermore, if the individual Resident shareholder submits Form No. 15G or Form No. 15H, as the case maybe, then no TDS is applicable.

Rate of deduction of TDS on Dividend Income

The  rate at which tax needs to be deducted from dividend payment is 10%. If the shareholder who is the recipient of such dividend is unable to furnish his PAN Card to the company   or has an invalid PAN Card or has not linked his PAN Card with his Aadhar Number, then tax would be deducted at the rate of 20%.

TDS on Dividend Income paid to other entities

  • Resident Non-Individual Shareholder- Shareholders such as HUF, Firm, AOP, BOI, Company, i.e. non-individual entities are required to pay TDS on the entire amount of dividend received. Rate of deduction will 10% if there is a valid Pan card, otherwise 20%.
  • Insurance Companies- No tax is deducted on the dividend that is paid to insurance companies in case it provides a self declaration of ownership of the shares and has full beneficial interest on them, along with a self- attested PAN Card.
  • Mutual Funds- TDS is not applicable on dividend paid to Mutual Funds under Section 10(23D) of the Act. The Mutual Fund must provide a self-declaration alongwith a self-attested copy of PAN Card and registration certificate.
  • Intermediaries and Stock Brokers- Rule 37BA provides that if the shares are being held by intermediaries/ stock brokers and tax is deducted by the company in the Pan of the beneficial shareholders, then such intermediaries/ stock brokers will have to provide the details of the beneficial shareholders along with self declaration that the shareholders are the beneficial owners of the shares and hence the TDS will be credited to the account of the beneficiary PAN.
  • Non-Resident Shareholders– The rate of deduction for non-resident shareholders is 20% (plus applicable surcharge and cess). In case the shareholder is a beneficiary of a tax treaty, then he shall pay TDS at the rate which is mentioned in the tax treaty. In order to avail tax-treaty benefits, the shareholder must submit the below mentioned documents:
    • Tax Residency Certificate for FY 2022-2023, the year in which the dividend is received (obtained from tax/revenue authorities of resident country)
    • Form 10F as the per the format specified in the Act (Annexure 3)
    • Copy of PAN Card attested
    • Self declaration of beneficial ownership and not having a PE in India (Foreign Companies: Annexure 4, Foreign Individuals-Annexure 5)

It is to be noted that the company paying such dividend is not responsible for suggesting application of beneficial DTAA rates at the time of deduction. The Company shall allow for the application of these rates only after a complete and satisfactory review of the Company, of the documents submitted by the non-resident shareholder.

If such application is found unsatisfactory, then the rate of deduction shall be 20% along with Surcharge and Health and Education Cess at 4%.

Exemption from deduction of TDS under section 194 of Income Tax Act

The Finance Act 2021 introduced two categories which will be exempted from deduction of TDS from dividends:

  • A business trust as defined under Section 2 Clause 13A, by Special Person Vehicle (SPV) referred to in Explanation to Section 10 Clause (23FC);
  • Any other person notified by the Central Government in the Official Gazette in this regard.

Verbatim of Section 194

For the verbatim of Section 194 of Income Tax Act, find the link attached below;

Click here for Verbatim of Section 194

TDS Sections

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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