Updated on November 26, 2024 12:29:27 PM
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.
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:
Types of Dividend covered under section 2(22)
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.
Under Section 194, TDS is deducted by:
The TDS rate on dividend payments depends on the status of the shareholder (whether resident or non-resident) and the amount of the dividend.
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.
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:
When TDS is deducted | When to deposit TDS |
---|---|
April - February | On or before 7th of next month |
March | On or before 30th April |
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.
While TDS is generally applicable on dividend payments, there are certain exemptions where TDS u/s 194 may not be deducted. These include:
Failure to deduct TDS or remit the deducted amount to the government can lead to penalties, which may include:
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:
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.
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.
Yes, TDS u/s 194 is applicable to all dividend payments if the total amount exceeds ₹5,000 in a financial year.
Yes, a resident shareholder can submit Form 15G or Form 15H (for senior citizens) to claim exemption from TDS if their total income is below the taxable threshold.
Non-resident shareholders can claim a lower TDS rate under DTAA provisions by submitting a tax residency certificate to the payer.
If the company fails to deduct TDS, it may be held liable for the TDS amount along with penalties and interest charges.
Yes, mutual fund investors can claim credit for the TDS deducted on dividends received from mutual funds by filing their income tax return.