Section 194 of Income Tax Act

Section 194 IT Act meaning refers to the dividends received by shareholders from equity shares are taxable and liable to TDS (tax deducted at source). The issuing company must deduct 10% TDS on the dividend amount if it is more than ₹10,000 per assessee in a year. Both Indian and foreign companies paying dividends or planning to pay dividends must deduct TDS.

Finance Act 2020 changed the provisions of Section 194, abolishing the earlier provisions of DDT (dividend distribution tax). Earlier, shareholders were exempt from paying taxes on receiving dividends, while issuing companies were made liable for paying the tax to the government.

Moreover, before Budget 2025, the limit for TDS deduction was ₹5000 in a year.

See Also: All About TDS (Tax Deducted at Source)

The following entities are responsible for paying TDS under Section 194 of the IT Act:

Domestic Company

Any Indian company that pays dividends to shareholders is also responsible for collecting TDS and depositing it with the government. Section 194 applies to dividends paid by companies from their income earned in India and for both resident and non-resident shareholders. Listed, unlisted, public and private companies all carry the responsibility.

Foreign Company

Foreign companies, whose worldwide income is taxable, are liable to deduct and pay TDS when distributing dividends to resident Indians. However, for non-residents, there is no TDS requirement since the income is not taxable in India.

Person Responsible for Deducting TDS

The principal officer appointed by the company to make arrangements for declaring or paying dividends is responsible for deductions u/s 194. They must deduct tax at source before making each dividend payment and pay the amount to the government before the due date.

The sub-sections under Section 2(22) of the Income Tax Act define the different types of dividends on which TDS deductions are applicable (deemed dividends):

• Any accumulated profits distributed by a company to its shareholders are considered a dividend. This includes the release of company assets.
• Debentures, debenture stocks, deposit certificates and bonus shares distributed to preference shareholders are also considered dividends.
• Assets distributed, including accumulated profits, to shareholders after the liquidation of the company, are considered dividends.
• If the company reduces its share capital before paying its accumulated profits, that is considered a dividend.
• Any loans or advances made to a shareholder with beneficial interest in the company are deemed dividends if paid out of accumulated profits.

Here are the latest rates of tax deductions under Section 194:

Standard Rate

Tax is deducted at source at a 10% rate on dividends if the total amount in a year is ₹10,000 or more. The tax must be deducted when crediting or making payment, whichever is earlier, and for payments via cheque, draft or online modes.

Penalty Rate

TDS is deducted at a 20% rate when the shareholder’s PAN is not available or submitted. The 20% rate also applies in cases where the person’s PAN is deemed inoperative as it’s not linked with their Aadhaar number.

Rate for Non-Residents

For non-residents, a flat 20% rate applies under Section 195 TDS provisions, plus applicable surcharge and cess. However, in cases where the shareholder resides in countries with a favourable Double Tax Avoidance Agreement (DTAA) with a Multilateral Instrument (MLI), the TDS rate will be as per the DTAA.

TDS, once collected must be deposited with the government within the following deadline:

• TDS Deducted from April to February: The tax deducted must be deposited with the government by the 7th of the next month. If the 7th falls under a public holiday or is a Sunday, the next working day is the final deadline.
• TDS Deducted in March: The tax withheld needs to be deposited by 30th April.

See Also: How to Make TDS Payment Online

• Dividends Below the TDS Threshold: No TDS is deducted if the total dividend amount paid by a company to a shareholder in a financial year is less than ₹10,000.
• Submission of Form 15G/Form 15H: If an eligible resident shareholder doesn’t have a taxable annual income, they can submit a Form 15G/15H (Form 121 from 2026 onwards) to the issuing company. This declaration makes them eligible for nil TDS deduction.
• Tax Withholding Certificate: An eligible taxpayer can submit a nil or low tax withholding certificate to the company before dividends are issued. This makes them eligible for lower or zero TDS deductions.
• Institutional Exemptions: Section 194 tax deductions do not apply to dividends paid to certain insurance companies, including the Life Insurance Corporation of India (LIC) and the General Insurance Corporation of India (GIC). TDS exemption also applies to central government authorities, mutual fund houses, NPS (National Pension Scheme) trusts and business trusts receiving dividends from Special Purpose Vehicles (SPVs).

Investing in securities is a widely recognised method of earning a side income in India. Therefore, every individual must be aware of the tax implications of earnings through various types of securities and investments. Section 194 lays out the provisions for tax deductions on income from dividends from equity shares above a certain threshold and exemptions in certain cases.

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