What is Dividend & Dividend Distribution Tax (DDT)?
- Dividend – It is the distribution of profits by a corporation or company to its shareholders. When a corporation earns a profit or surplus, it pays a proportion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business. It is called retained earnings.
- Dividend Distribution Tax (DDT) – it is tax levied on dividends that a company pays to its shareholders out of its profits. DDT is taxable at source and is deducted at the time when company distributes dividends.
Section 194 – Dividend Under income tax act
Section 194 of income tax act, 1961 specifically deals with Tax deducted at sources (TDS) on dividends paid by a company to its shareholders. The aim is to ensure that taxes are collected at the source itself when dividends are paid out.
Who does this apply to Section 194?
Section 194 is applicable to those companies which pay dividend which pay dividend to their shareholders. TDS deduction is for those shareholders who receive dividend, for example if a company pays dividend to its shareholders, then that company will deduct TDS on the dividend amount when it is paying money to the shareholders.
When is TDS deducted in Section 194?
TDS is deducted at the time of dividend payment, bot at the time of deduction of dividend. It means that when the company declares dividend, tax is deducted from it, but when it gives the actual dividend to the shareholder, then TDS is deducted. For instance, if the company has declared dividend in January, but has paid the dividend in February, the TDS will be deducted in February only, when the payment is made.
TDS Threshold Limit for Section 194
TDS is deducted only if the total dividend in a financial year is more than Rs. 10,000, If a shareholder gets one or more dividends in a financial year, then TDS will be deducted if their total dividend amount is more than Rs 10,000. Example if a shareholder gets dividend from a company 3 times –
- 1st payment – Rs 6,000
- 2nd payment – Rs.4,500
- 3rd payment - Rs. 3,000
If the total dividend is Rs. 13,500, then TDS will be deducted. If the total dividend is less than Rs. 10,000 then TDS will not be deducted.
TDS Rate for Section 194
The TDS rate is 10% if the shareholder has provided the PAN number, if the shareholder has not furnished the PAN number, the number, the company will deduct TDS at the rate of 20%.
For example – if a shareholder is getting a dividend of Rs.11,000 and he has given his Pan number
- TDS Rs. 11,000 x 10% = Rs. 1000
- Amount to be paid to shareholder – Rs. 9,900 (11,000 – 1,100)
- If the shareholder has not given the Pan number, the company will deduct Rs. 11,000 x 20% = Rs. 2,200 TDS, and the shareholder will get Rs. 7,800.
When TDS is not applicable on Section 194
TDS is not deducted in some situations like, Resident individual should submit form 15G (if his taxable income is zero) or from 15H (if senior citizen), TDS is not deducted even for certain specified entities like mutual funds, insurance companies, or government entities that receive dividend. For example – if there is a senor citizen whose total income is below the taxable slab, he can avoid TDS deduction by submitting Form 15H.
TDS Return Filing Section 194?
The company has to file TDS return quarterly. Form 26Q is used for this. After deducting TDS, the company has to issue Form 16A which tells the shareholder how much TDS has been deducted from them and paid to the government. For example – if a company pays Rs. 10,000 dividend and deducts TDS, then the company has to file Form 26Q quarterly and issue Form 16A to the shareholder.
TDS Certificate
From 16A is a TDS certificate that the company gives to the shareholders, which confirms that TDS has been deducted from that shareholder and paid to the government. Shareholder can use this certificate in their income tax return.
Note: TDS deposit date, non deduction of TDS, Interest and penalty on TDS, to know these query kindly visit my Blog - Tax Deduction at Source in India
Conclusion
Being informed about TDS on dividends under Section 194 is essential for all investors. It not only helps in effective tax planning but also ensures that you are compliant with the tax laws. Stay proactive in managing your investments and understanding the tax implications to make the most of your financial journey.
FAQ's
How to I Claim TDS credit?
You can claim the TDS credit while filing your income tax return. The deducted amount will be reflected in your 26AS or AIS (Annual Information System), and you should include the gross dividend amount in your taxable income.
Are there any exemptions from TDS on dividends?
Yes, dividends that fall under 10(34) exempt incomes are not subject to TDS also specific like LIC, GIC, or other specified institutions may qualify for TDS exemption under certain conditions.
What is due date for depositing TDS?
The company or deductor must deposit the TDS with government by the 7th of the next month, for march deductions the due date is April 30.
Does Sec 194 apply to non-resident shareholders?
No, Sec 194 only applies to resident shareholders. For non-residents, TDS on dividends is governed by sec 195 and the applicable rate may vary depending on Double taxation avoidance agreements (DTAAs)
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