Under Budget 2020 applicable from 1st April 2020 i.e. FY 2020-21, the Finance Minister abolished Dividend Distribution Tax (DDT). As a result, the Finance Minister made an amendment to the existing Section 194 to add a provision to deduct TDS on Dividend from Equity Shares.
What is Section 194?
In Section 194, the dividend received on equity shares that were earlier exempt is now taxable at slab rates. Since the income would be taxable in the hands of the shareholder, TDS would be applicable.
The Company paying a dividend on equity shares should deduct TDS under section 194. The deduction is at 10% on the number of dividends, only if a resident shareholder’s total dividend in a financial year exceeds INR 5,000. Section 194 of the Income Tax Act is applicable from 1st April 2020 i.e. FY 2020-21 onwards.
Analysis of Section 194 of the Income Tax Act
- Deductor
- The company distributing dividends to the investors of equity shares should deduct TDS on such dividends. The deductor must deposit the TDS and file the TDS Return on TRACES.
- Deductee
- Shareholder resident in India earning dividend income on equity shares will receive the amount after TDS under Sec 194. Shareholder residents in India earning dividend income on equity mutual funds will receive the amount after TDS under Section 194K. NRI investors/shareholders, earning dividend income will receive the amount after the deduction of TDS under Section 195.
- Nature of Payment
- Sec 194 covers the payment of Dividends on Equity Shares to a resident shareholder exceeding INR 5000 in a financial year.
When to Deduct TDS under Section 194?
- TDS shall be deducted at the time of credit of income to the payee account or at the time of payment, whichever is earlier.
- If the payee of the amount credits the amount to be paid to a “suspense account” or any other account, it is considered a ‘deemed payment, and the payer must deduct TDS on such credit.
Rate of TDS under Section 194
Deductor should deduct TDS u/s 194 at the rate of 10% if the dividend amount exceeds INR 5000. If the payee does not provide the PAN, TDS shall be deducted at the rate of 20%
TDS Certificate
Deductor shall issue Form 16A to the deductee as the Tax Credit Certificate of the amount deducted as TDS. The Deductor can download Form 16A from the account on TRACES. Using Form 16A, the deductee can claim credit for the tax deducted while filing an Income Tax Return.
TDS Return
After depositing TDS with the income tax department, the deductor should file Form 26Q on TRACES. The details of the dividend payment are part of this report. The deductor, after filing the report, should provide Form 16A to the deductee.
FAQs
Section 195 applies to the dividend paid to NRI investors/shareholders, as per provisions of the Income Tax Act. Hence, TDS needs to be deducted from the dividend at 20% on equity shares and equity mutual funds.
DDT is the tax paid on the declaration, distribution or payment of dividends by an Indian Company at the rate of 15%. Since the Indian Company pays DDT, the dividend income is exempt in the hands of the shareholder or investor.
However, In the Budget 2020, the Government abolished DDT from 01.04.2020 i.e. FY 2020-21. The dividend is now taxable in the hands of the shareholder or investor. The company is liable to deduct TDS at 10% if the dividend is in excess of INR 5000.
When the income is below the exemption limit and you have submitted Form 15G/15H.
Hey @Rachit_Awasthi1,
Under Budget 2020, the Finance Minister abolished Dividend Distribution Tax i.e. DDT. As a result, dividend became a taxable income. Since it was now taxable, TDS would be applicable on it. Thus, the Budget also introduced the provision to deduct TDS on the dividend.
TDS (Tax Deducted at Source) is applicable to many taxable incomes such as salary, professional fees, interest, commission etc. Since dividend income is a taxable income, TDS is applicable to it.
You can claim the credit of deducted TDS as taxes already paid when you file your Income Tax Return. If the tax liability is more than TDS credit, you need to pay only differential tax. If the tax liability is less than TDS credit, you can claim a refund of the excess amount.
If you have received an email for dividend you can know more about TDS on dividend paid in FY 2020-21 in the article mentioned below.
I am salaried person, gross income 10 lakh and comes in individual resident category. I invested in share market and also get dividend 8000. But i am confused that how much dividend amount is tax-free in below options:
TDS will be deducted at 10% on dividends received above INR 5000.
Tax of 10% on dividend income in excess of Rs. 10 lakh per year.
so which option is correct for current FY and option 2 is applicable to whom ?
@Laxmi_Navlani @Divya_Singhvi @AkashJhaveri @Kaushal_Soni can you?
Option 2 of 10 lakhs applicable to which category ?
Hey @Kuldeep_Singh,
From AY 2021-22 onwards, dividend received by shareholder will be taxed in the hands of shareholders and not on company. Dividend is not tax free income and hence if total dividend exceeding of Rs. 5000 is liable to deduct TDS u/s 194 at the rate of 10%.
Prior to AY 2021-22, tax on dividend was applicable to shareholders only when total amount exceeds 10 lakhs but now there’s no relevance of sec.115BBDA.
For more understanding, you can refer below article for taxation on dividend income:
Hope, it helps!
Hi, I have a dividend which is declared on 31-03-21, but it is not credited in my bank account on this date, it was just declared, now while filing ITR for FY-2021 , should I count this dividend for FY21 or since this dividend is credited after FY-21 to my bank account, I should include it next year.
kindly help me with this,
Hey @Sheirsh_Saxena, you will declare this income in the assessment year of the corresponding financial year in which you receive this dividend income. You can read more about it from here:
Hi, I hold units of an INVIT, particularly IRB invit fund, which quarterly payout an amount, but each quarter I have received an amount less than the mentioned per unit, since the TDS was being deducted on it, each quarter.
Is there any way I could receive the TDS amount back, and how,
I have recently received a form 16A from IRB invit fund ,which shows 3000 has been paid as TDS already.
Any suggestions, how does it work.
Hey @Sheirsh_Saxena,
You can claim the TDS deducted by filing your ITR.
Here’s an article, where you can learn more about Taxes on Dividends.
Hi @Clayton
You can refer to the following answer by Nithin Kamath.
If you need further clarification, feel free to reach out.
Will be happy to help.