Section 194 of the Income-tax Act mandates that Indian companies must deduct 10% income tax on dividends paid to shareholders who are residents in India, before making any payment. The first proviso to this section exempts tax deduction if the total dividend paid to an individual shareholder does not exceed Rs. 5,000 in a financial year. The Finance Bill, 2025 proposes to amend this threshold, increasing the exemption limit to Rs. 10,000. This means that individual shareholders receiving up to Rs. 10,000 in dividends during the year will not have tax deducted at source. This change will come into effect from April 1, 2025.
Budget 2025: Section 194 – Dividends
Section 194 of the Act requires that the principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment by any mode in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of all sub-clauses of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rate of 10%.
2. The first proviso to this section states that no tax is required to be deducted when the amount or aggregate of amounts of such dividend, distributed or paid or likely to be distributed or paid, during the financial year by the company to the shareholder, being an individual, does not exceed Rs. 5,000/-.
3. It is proposed to provide that no tax is required to be deducted when the amount or aggregate of amounts of such dividend, distributed or paid or likely to be distributed or paid, to the shareholder, being an individual, does not exceed Rs. 10,000/-.
4. This amendment will take effect from the 1st day of April 2025.
[Clause 52]
Extract of Relevant Clauses of Finance Bill, 2025
Clause 52 of the Bill seeks to amend section 194 of the Income-tax Act relating to dividends.
The said section provides for deduction of tax in respect of dividends. The first proviso to the said section provides that no tax is required to be deducted under this section if the dividend is paid by the company by any mode other than cash and the amount of such dividend or, as the case may be, the aggregate of the amounts of such dividend during the financial year by the company to the shareholder, being an individual, does not exceed five thousand rupees.
It is proposed to amend the first proviso to the said section so as to provide that no tax is required to be deducted at source if the amount or aggregate of the amounts of such dividend during the financial year by the company to the shareholder, being an individual, does not exceed ten thousand rupees.
This amendment will take effect from 1st April, 2025.
Extract of Relevant Amendment Proposed by Finance Bill, 2025
52. Amendment of section 194.
In section 194 of the Income-tax Act, in the first Amendment of proviso, in clause (b), for the words “five thousand rupees”, the section 194. words “ten thousand rupees” shall be substituted.
