Section 194 | TDS on Dividend

Introduction to Section 194: TDS on Dividend

In India, dividend income is subject to taxation, and the mechanism for tax collection is governed by Section 194 of the Income Tax Act. This section outlines the provisions for Tax Deducted at Source (TDS) on dividend payments made by companies to shareholders. This article will provide a comprehensive guide to Section 194, focusing on who is liable to deduct TDS, the applicable rates, exemptions, filing requirements, and how to claim TDS credit.

Meaning of Dividend as per Income Tax Act

Under the Income Tax Act of India, "dividend" is defined in Section 2(22). The term refers to the distribution of profits made by a company to its shareholders. However, the Income Tax Act has a specific and detailed definition that includes various forms of distributions beyond the typical cash payment.

As per Section 2(22) of the Income Tax Act, dividend includes:

• Any distribution of profits by a company to its shareholders, whether in cash or kind.
• Distribution of accumulated profits by a company in the form of a return of capital to its shareholders.

Types of Dividend covered under section 2(22)

• Interim Dividend: A dividend declared by the company before the end of the financial year.
• Final Dividend: A dividend declared by the company at the end of the financial year, subject to approval by the shareholders in the annual general meeting (AGM).
• Bonus Shares: When a company issues additional shares to its existing shareholders instead of paying a cash dividend, this is considered a form of dividend for tax purposes.
• Dividend in Kind: Dividends can also be in the form of property, like stock or physical assets, instead of cash.
• Distribution by a Cooperative Society: Under certain circumstances, any distribution of profits by cooperative societies to their members is also considered as dividend.

What is TDS on Dividend?

TDS on dividends refers to the tax deducted by the company at the time of paying dividends to the shareholder or investor. This TDS is deducted at a prescribed rate, and the amount is remitted to the government. The person receiving the dividend (the shareholder) can claim credit for the TDS while filing their income tax return (ITR).

The purpose of TDS is to ensure that taxes on dividend income are collected upfront, and that the shareholder is not burdened with paying the entire tax liability at the time of filing their return.

Who is Liable to Deduct TDS Under Section 194?

Under Section 194, TDS is deducted by:

• Companies: Any company paying dividends to its shareholders, including both domestic and foreign companiesThe company distributing the dividend is responsible for deducting the TDS, and the rate of deduction depends on the shareholder’s tax status (whether resident or non-resident).

Rate of TDS on Dividend Payments

The TDS rate on dividend payments depends on the status of the shareholder (whether resident or non-resident) and the amount of the dividend.

For Resident Shareholders:

• TDS Rate: The TDS rate for resident individuals and entities is 10% on the total dividend payment which exceeds the threshold of ₹5,000.

For Non-Resident Shareholders:

• TDS Rate: For non-residents (including foreign investors), the TDS rate on dividends is 20% (subject to the provisions of any applicable Double Taxation Avoidance Agreement, or DTAA).

Threshold Limit: TDS on Dividend Under Section 194 is applicable when the total dividend paid during the financial year exceeds ₹5,000. If the total dividend amount is below ₹5,000, TDS u/s 194 is not applicable.

When to deduct and deposit TDS on Dividend u/s 194?

Time for Deduction :

The TDS u/s 194, TDS on Dividend payments is required to be deducted at the specified rate only at the time of payment.

Time to Deposit :

TDS on Dividend payments which is deducted u/s 194 and is required to be deposited to the central government. Time to deposit of TDS on Dividend payments is given below:

For example, Tax on Dividend payments is deducted on 15th December and needs to be deposited on or before 7th January. TDS on Dividend is deducted on 21st March ; needs to be deposited on or before 30th April.

Exemptions from TDS on Dividend u/s 194

While TDS is generally applicable on dividend payments, there are certain exemptions where TDS u/s 194 may not be deducted. These include:

• If the recipient provides a valid Form 15G (for individuals) or Form 15H (for senior citizens) and their income is below the taxable threshold, no TDS will be deducted on dividend payments.
• In some cases, dividends from specific government bonds or other exempt income sources may be exempt from TDS.
• No TDS u/s 194 is required to be deducted if payment made to an individual by any mode other than cash and payment is up to ₹5,000 in a previous year.
• No TDS is required to be deducted u/s 194, TDS on dividend payments, if dividend is given to Life Insurance Corporation (LIC), General Insurance Corporation or any other insurer; provided the shares are owned by them, or they have full beneficial interest in such shares.

Penalties for Non-Compliance with Section 194

Failure to deduct TDS or remit the deducted amount to the government can lead to penalties, which may include:

• TDS is not deducted: If a deductor has not deducted the TDS from the payment of dividend, it charges interest of @1% per month till the date TDS is deducted.
• TDS is deducted but not deposited: If a deductor has deducted the TDS from the payment of dividend but has not deposited the collected tax to the government, then it charges interest @1.5% from the date when tax is deducted to the date of deposition.
• Late Filing Fees: If the company fails to file TDS returns on time, they could be penalized with fees under Section 234E. That is, ₹200/ day subject to maximum TDS.
• Prosecution: In severe cases of non-compliance, prosecution under Section 276B can result in fines or imprisonment.

Why choose Bizfoc for TDS?

At Bizfoc, we specialize in providing you the best accounting services in filing your TDS. Here are the reasons why we are known for our services to our clients on filing TDS:

• Assist in suggesting the right documents for TDS filing.
• Providing valuable insights on sections of TDS computations
• Prescribe forms as per the necessity
• Helps in accurate computations for TDS computations and returns
• Tailored advice and guidelines for TDS filing

In general, we assist the client to solve their queries and doubts regarding the documentation, procedures, and fees for filling out the form. Other than making your filing successful, we help you make a better decision by covering every aspect of what you actually need to get your TDS.

Conclusion

Section 194 of the Income Tax Act plays a critical role in the taxation of dividend income by ensuring the collection of tax at the source. For both companies and shareholders, understanding the TDS provisions under this section is essential for compliance and effective tax planning. Whether you’re a resident or non-resident investor, keeping track of TDS deductions and claiming tax credit can help you manage your tax liabilities efficiently.

Frequently Asked Questions (FAQs)