Section 194 of Income tax act – TDS on dividend
Section 194 of Income tax act deals about deduction of TDS on payment of TDS. When dividend is declared over equity shared, taxation of such is covered in Section 194 and if dividend income is from mutual funds, such is covered in Section 194K. So, moving further we will move step by step and resolve the queries related to Section 194.
What is Section 194 and who is required to deduct TDS?
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 deduct from the amount of dividend income tax at the rate of ten percent.
In other words, suppose ABC Limited declares dividend and pays dividend to the shareholder amounting to INR 10,000, then TDS at the rate of 10% needs to be deducted i.e. 10% of 10,000 and pay remaining amount of INR 9,000 to the shareholder.
TDS is required to be deducted before the following.
- Prior to the cash payment of dividend.
- Before writing a dividend check or warrant.
- Before giving a shareholder any payment or distribution of a dividend, as defined by Section 2 (22).
Further, important point to be covered is shareholder should be resident individual to be covered in Section 194. In case, shareholder is a non resident, then TDS would be deducted at the rate of 20% plus applicable surcharge and cess or rates as per DTAA whichever is beneficial.
Whether TDS is required to be deducted in all cases?
Under Section 194 it is clearly mentioned no deduction shall be made in case of a shareholder, being an individual if both the below conditions are satisfied.
- Dividend is paid by the company by any mode other than cash and
- Amount of such dividend or the aggregate of aggregate of the amounts of such dividend distributed or paid or likely to be distributed or paid during the financial year by the company to the shareholder, does not exceed five thousand rupees.
When both the above conditions would be satisfied, TDS would not be required to deducted.
Further, if an assessee submits Form 15G or 15H, no TDS shall be required to deducted which states the income is below exemption limit. Hence, no TDS deduction required in those cases.
Exemptions provided by the government under Section 194
Section 194 does not applies to the income credited or paid by to the i.e. when dividend is paid the the entities mentioned below TDS would not be required to deducted.
- Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), in respect of any shares owned by it or in which it has full beneficial interest.
- General Insurance Corporation of India (hereafter in this proviso referred to as the Corporation) or to any of the four companies (hereafter in this proviso referred to as such company), formed by virtue of the schemes framed under sub-section (1) of section 16 of the General Insurance Business (Nationalization) Act, 1972 (57 of 1972), in respect of any shares owned by the Corporation or such company or in which the Corporation or such company has full beneficial interest.
- Any other insurer in respect of any shares owned by it or in which it has full beneficial interest.
- “Business trust”, as defined in clause (13A) of section 2, by a special purpose vehicle referred to in the Explanation to clause (23FC) of section 10.
- Any other person as may be notified by the Central Government in the Official Gazette in this behalf
Akash Arora is a Chartered Accountant by profession and the founder of this website. His expertise areas include compliance with Goods and Service tax and Direct taxes in India. He has written more than 70+ blogs on GST and Direct tax.
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