Section 194 – TDS on dividend

The provisions relating to TDS on dividend is covered under Section 194 of the Income Tax Act, and the same has been explained briefly in the current article.

Going through the basic provisions of section 194 of the Income Tax Act –

As per the provisions of section 194 of the Income Tax Act, the Principal officer of an Indian Company or a Company making prescribed arrangements for declaration and payment of the dividend within India is required to deduct TDS on dividend, if the following conditions are satisfied –

1. The dividend is paid to the shareholder who is resident in India; and

2. The dividend covered within the meaning of Clause (a) to (e) section 2(22).

It is important to note that the dividend referred above covers the dividends on preference shares also i.e., TDS is to be deducted on dividends on preference shares if provisions of section 194 gets attracted. Further, payment of TDS on dividend to non-resident is not covered within the provisions of section 194.

Time of deduction of TDS on dividend –

As per provisions of section 194 of the Income Tax Act, the Deductor is required to deduct the TDS earlier of the following dates –

• Before making payment in cash; or
• Before issuing any cheque or warrant; or
• Before making any distribution or payment.

Rate of TDS on dividend –

The Company liable to deduct TDS as per provisions of section 194 is required to deduct TDS @10%. However, in case the shareholder fails to furnish the Permanent Account Number (PAN), then, the Company would be liable to deduct TDS at the maximum marginal rate.

Exemption from deduction of TDS on dividends–

Following is a list of dividends on which TDS is not required to be deducted as per section 194 –

1. Dividend paid to an individual where the aggregate amount of dividend, paid by the company to the individual, during the financial year does not exceed INR 2,500 and such dividend is paid by an account payee cheque.

2. Dividend paid to the Life Insurance Corporation of India in respect of shares owned by it or have a full beneficial interest.

3. Dividend paid to the General Insurance Corporation of India in respect of shares owned by it or have a full beneficial interest.

4. Dividend paid to any other insurer in respect of shares owned by it or have a full beneficial interest.

5. Dividend covered by provisions of section 115-o.

6. Declaration has been filed either in Form 15G or Form 15H.

Frequently Asked Questions (FAQ) –

Q.1 Is TDS deducted on dividend income?

Ans. Yes, if the provisions of section 194 of the Income Tax Act gets attracted, TDS is required to be deducted on such dividend income.

Q.2 What percentage of TDS is deducted?

Ans. The Company liable to deduct TDS on dividend as per provisions of section 194 of the Income Tax Act is required to deduct TDS @ 10%.

Q.3 What if TDS is not deducted?

Ans. If the Company, required to deduct TDS as per section 194, fails to deduct TDS, in that case, the company would be liable to pay Interest @ 1% per month from the date on which the tax was liable to be deducted till the date of actual deduction.

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