According to section 194 of the Income Tax Act, the principal officer of an Indian company must deduct tax at source from any dividend declared and paid to residents before disbursing the payment. This tax deduction applies specifically to dividends on equity shares.
According to Section 194, Tax Deducted at Source (TDS) must be deducted at a rate of 10% if the total dividend income of the receiving shareholder exceeds ₹5,000 in a given year. The tax deduction must be made at the time of payment or when the credit is applied, whichever occurs first.
TDS at 20% must be deducted from shareholders without PAN.
Increased Threshold Limit
The limit for TDS deduction on dividend income has been increased from ₹5,000 to ₹10,000. As a result, companies must now deduct TDS at a rate of 10% only when the total dividend paid to a resident shareholder surpasses ₹10,000 in a financial year.
Applicability
Deductor
Any domestic company distributing dividends to its resident shareholders.
Deductee
Shareholders who are residents and receive dividend income from equity shares.
TDS Rate
Standard Rate
A tax rate of 10% applies to dividend amounts that exceed ₹10,000 in a financial year.
Non-PAN Holders
If a shareholder has not provided their Permanent Account Number (PAN), TDS will be deducted at a rate of 20%.
Exceptions
- Dividend Amount: No TDS is deducted if dividends are paid in modes other than cash, and the total dividends do not exceed ₹10,000 in a financial year.
- Specific Entities: TDS provisions do not apply to dividends credited or paid to entities such as the Life Insurance Corporation (LIC), the General Insurance Corporation (GIC), and any other insurer regarding shares owned or beneficially held by them.
Declaration for non-deduction
Form 15G/15H
Shareholders whose total income falls below the taxable limit can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to the company.
This declaration confirms that their income is below the taxable threshold, allowing them to avoid the deduction of TDS on their dividend income.
Example
If a resident individual receives a dividend of ₹10,000 from a company:
TDS @ 10% = ₹1,000 (if PAN is provided).
Net amount received = ₹9,000.
The recipient must include the gross dividend (₹10,000) in their taxable income and can claim credit for the TDS deducted.
FAQs
No, Section 194 applies only to resident recipients. For non-residents, TDS on dividends is governed by Section 195, and the rate may vary based on Double Taxation Avoidance Agreements (DTAAs).
The TDS amount is reflected in your Form 26AS or AIS (Annual Information Statement). You can claim credit for the TDS while filing your income tax return by including the gross dividend amount in your taxable income.
Yes, dividends covered under Section 10(34) (exempt income) are not subject to TDS.
Additionally, certain entities like LIC, GIC, or other specified institutions may be exempt from TDS under specific conditions.
The deductor (company or mutual fund) must deposit the TDS with the government:
By the 7th of the following month (if TDS is deducted in March, the due date is April 30).