Copyright © 2024-2025 DisyTax. All Rights Reserved.
🚨 ITR Filing & Tax Refund Services
Audit Due: Sep 30 | Non-Audit Due: Jul 31 | Avoid ₹5,000 Penalty
💬 Consult to File ITRTable of Contents
- Updated On : June 25, 2025
Complete Guide to TDS on Dividend under Section 194 – DisyTax
TDS on dividend payments is governed by Section 194 of the Income Tax Act, 1961. This section mandates that companies must deduct TDS before paying dividends to resident shareholders. In this article, DisyTax explains the complete mechanism, compliance, and exemptions under Section 194.
What is Section 194?
Section 194 requires domestic companies to deduct tax at source before making dividend payments to resident shareholders, provided the amount exceeds a specified threshold. It came into active effect after the abolition of Dividend Distribution Tax (DDT) via Finance Act 2020.
Who is Required to Deduct TDS?
- Any Indian company declaring or paying dividend to a resident shareholder.
- Mutual Funds or business trusts are not covered under this section.
TDS Rate under Section 194
- 10% – If PAN is furnished by the shareholder.
- 20% – If PAN is not provided under Section 206AA.
- No surcharge or cess is added to this TDS rate.
Threshold Limit
No TDS is required if the dividend amount paid or likely to be paid during the financial year does not exceed ₹5,000 per shareholder.
Exemptions from TDS under Section 194
- Dividend paid to LIC, GIC, or any other insurer with full beneficial interest.
- Dividend paid to government, RBI, or notified institutions.
- Dividend paid to mutual funds covered under Section 10(23D).
Form 15G/15H for Non-Deduction
Resident individuals whose total income is below the taxable limit can submit Form 15G or 15H to the company and avoid TDS deduction on dividends.
Example
Example: XYZ Ltd declares ₹10,000 dividend to Mr. Kumar (resident individual). As the dividend exceeds ₹5,000, TDS @10% i.e., ₹1,000 is deducted.
Due Dates for TDS Deposit & Return
- Deposit TDS: On or before 7th of the next month.
- Quarterly TDS Return: File in Form 26Q every quarter.
- Issue TDS Certificate: Form 16A to be issued quarterly.
Common Errors & Solutions
- Error: Not deducting TDS where dividend > ₹5,000 → Solution: Track cumulative dividend.
- Error: Non-collection of PAN → Solution: Collect PAN or deduct @20%.
- Error: Late filing → Solution: Automate compliance reminders.
Frequently Asked Questions (FAQs) on Section 194
What is Section 194 of the Income Tax Act?
It mandates TDS on dividend income paid to resident shareholders by Indian companies if it exceeds ₹5,000 in a financial year.
Who is responsible for deducting TDS under Section 194?
The company paying the dividend to a resident shareholder is liable to deduct TDS.
Is Section 194 applicable to non-residents?
No. For non-residents, dividend TDS is governed under Section 195 of the Income Tax Act.
What is the TDS rate under Section 194?
10% if PAN is provided; 20% if PAN is not furnished under Section 206AA.
Is surcharge or cess applicable to TDS under Section 194?
No. Surcharge and cess are not applicable on TDS under this section.
What is the threshold limit under Section 194?
No TDS is required if the dividend paid during the year does not exceed ₹5,000 per shareholder.
Can Form 15G or 15H be submitted to avoid TDS?
Yes. Eligible individuals can submit Form 15G/15H if their total income is below taxable limit.
What is the due date to deposit TDS deducted under Section 194?
TDS must be deposited on or before the 7th of the following month in which deduction is made.
How is TDS under Section 194 reported?
Using Form 26Q for quarterly return and Form 16A as the TDS certificate.
Is dividend from mutual funds covered under Section 194?
No. Mutual fund dividends are exempt from TDS under this section.
What are the exemptions from TDS under Section 194?
Payments to LIC, GIC, RBI, government institutions, and notified mutual funds are exempt.
When is TDS deducted under Section 194?
TDS is deducted at the time of credit or payment of dividend, whichever is earlier.
What is the consequence of not deducting TDS under Section 194?
Non-compliance can attract interest, penalties, and disallowance of expenses under Section 40(a)(ia).
Can TDS credit be claimed in ITR?
Yes. TDS deducted under Section 194 is reflected in Form 26AS and can be claimed while filing ITR.
Is TDS deducted on interim dividend?
Yes. TDS applies to both interim and final dividends under Section 194.