Section 194: TDS on Dividend from Equity Shares

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Sakshi Shah

Equity Trading
Form 16A
Form 26Q
Sec 194
TDS Sections
Last updated on February 3rd, 2023

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.

Section 194 TDS on Dividend from Equity Shares

Analysis of Section 194 of the Income Tax Act

When to Deduct TDS under Section 194?

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.

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FAQs

Is TDS required to be deducted from dividends paid to NRI shareholders?

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.

What is Dividend Distribution Tax (DDT)?

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 TDS is not required to be deducted?

When the income is below the exemption limit and you have submitted Form 15G/15H.

Got Questions? Ask Away!

  1. 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.

    • Sec 194 - A Company should deduct TDS at 10% on dividend paid on equity shares if the dividend amount exceeds INR 5,000. For FY 2019-20, this rate is reduced to 7.5%
    • Sec 194K - An AMC should deduct TDS at 10% on dividend paid on equity mutual funds if the dividend amount exceeds INR 5,000. For FY 2019-20, this rate is reduced to 7.5%

    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.

  2. 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:

    1. TDS will be deducted at 10% on dividends received above INR 5000.

    2. 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 ?

  3. Option 2 of 10 lakhs applicable to which category ?

  4. 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!

  5. 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,

  6. 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.

  7. 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.

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