Section 194 - TDS on Payment of Dividend

Analysis of Section 194

Here is the detailed analysis of tax deduction under section 194 considering the deductor, deductee, and the nature of payment:

Deductor

The following is the details related to deductor regarding tax deduction under section 194:

1. Under Section 194, TDS should be deducted on dividend of equity shares by the company distributing dividends to the investors
2. The deductor must deposit the TDS to the government and file TDS return on TRACES (TDS Reconciliation Analysis and Correction Enabling System)

Deductee

The following is the details related to deductee regarding tax deduction under section 194: 

1. Under Section 194, TDS will be deducted dividend income on equity shares of the shareholder residing in India

1. Under Section 194K, TDS deduction will be made on the earnings from dividend income on equity mutual funds
2. Under Section 195, TDS deduction will be made on the earnings from dividend income by NRI (Non-Resident Indian) shareholders or investors.

Payment

Dividends on Equity Shares exceeding Rs.5,000 for the financial year will be paid to the resident shareholder which is covered under Section 194.

When to Deduct TDS under Section 194?

The following are scenarios when TDS is deducted under section 194:

1. The payer must deduct TDS on credits paid to the ‘suspense account’ or any other account, which is considered ‘deemed payment’
2. TDS deduction will be made at the time of payment or credit of income to the payee account, whichever is earlier

What are the requirements to deduct TDS under section 194?

Here are the following details related to the requirements for deducting TDS under Section 194:

1. Under the sub-clause (a) or (b) or (c) or (d) or (e) of clause 22 of section 2, TDS on dividend will be deducted by the principal officer of a company involved in the process of declaring dividends.
2. dividends covered u/s 2(22)(a) or (b) or (c) or (d) are exempted from TDS deduction and is only applicable under section 2(22)(e) from 1 April 2003.

Note:

1. Section 2(22)(a): Any distribution of accumulated profit by the company which is deemed as dividend, whether capitalised or not, and the distribution includes release of all or part of company assets by the company to its shareholders.
2. Section 2(22)(b): Distribution of debentures, debenture-stock, or deposit certificates with or without interest in any form which is considered as dividend. The distribution of shares to preference shareholders can also be in the form of a bonus.

1. Section 2(22)(c): Distribution on liquidation of dividends to shareholders by company to such an extent that it is deemed as accumulated profit of the company whether capitalised or not.
2. Section 2(22)(d): On the reduction of its capital, dividend includes distribution by company to shareholders in such an extent that company possesses accumulated profit whether capitalised or not.
3. Section 2(22)(e): Any payment by a company not being company will be deemed dividend in the hands of shareholders and concerned person where public is substantially charged with interest on sum in the form of loan or advances.

Exemptions of TDS on payment of dividend

The following are the events when TDS is exempted on payment of dividend under section 194:

1. If section 115-O is applied on the dividend
2. Total amount does not exceed Rs.2,500 and paid by account payee cheque
3. Form 15G or 15H submitted if income is below taxable limit
4. The dividend for shares that have full beneficial interest and is paid to the GIC, LIC, or any of its subsidiaries, or other insurers

Note: Total amount should not exceed Rs.2,500 whether paid collectively or individually during the fiscal year.

Rate of TDS under Section 194

Here are following details regarding rate of TDS deduction under section 194:

1. Under Section 194, TDS will be deducted at the rate of 10%, if the dividend amount is more than Rs.5000
2. TDS will be deducted at the rate of 20% if PAN is not provided by the payee

TDS Certificate

The following are the details regarding TDS certificate:

1. Form 16A issued to deductee as the Tax Credit Certificate by the deductors for the amount deducted as TDS
2. Form 16A can be downloaded under ‘Account’ from the TRACES by the deductor
3. Credit for the tax deducted can be claimed by deductee while filing ITR using Form 16A

Form 15H

Here are some details regarding Form 15H

1. If income is below taxable threshold, then taxpayer can submit form 15H to avoid TDS deduction
2. This form is applicable for taxpayers of 60 years of age or above
3. Under sub-section (1C) of Section 197A of the Internal Revenue Code, individuals can file a declaration claiming specific receipts without deducting tax.

Form 15G

Under the provisions of subsections (1) and (1A) of Section 197A of the Internal Revenue Code, any entity be it individual or any person other than a firm or company can declare certain receipts without deducting tax.

Adjustments of Short Deductions

The deduction amount can be increased or decreased under section 194A by the person responsible for making the payment to rectify the deficiency or excess caused due to the prior deduction or failure to deduct TDS through the fiscal year.

Time Limit to Deduct TDS

The following are the time limit for deduction TDS:

1. The tax for month of March must be paid by or before 30 April
2. Tax must be deposited by the seventh month starting from April to February for the tax withheld for this period of time (April to February)