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 dividend received on equity shares and mutual funds which was earlier exempt is now taxable at slab rates. It is taxable in the hands of the shareholder. Since the income would be taxable in the hands of the shareholder, TDS would be applicable. As a result, the Finance Minister made amendment to the existing Section 194 to add provision to deduct TDS on Dividend from Equity Shares.
The Company paying a dividend on equity shares should deduct TDS u/s 194. The deduction is @ 10% on the amount of dividend, only if a resident shareholder’s total dividend in a financial year exceeds Rs. 5,000. Sec 194 is applicable from 1st April 2020 i.e. FY 2020-21 onwards.
Section 194 – TDS on Dividend from Equity Shares
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.
Shareholder resident in India earning dividend income on equity shares will receive the amount after TDS under Sec 194. Shareholder resident in India earning dividend income on equity mutual funds will receive the amount after TDS under Sec 194K. NRI investors/shareholders, earning dividend income will receive the amount after deduction of TDS under Sec 195.
- Nature of Payment
Sec 194 covers the payment of Dividend on Equity Shares to a resident shareholder exceeding Rs. 5000 in a financial year.
- Time of Payment
TDS shall be deducted at the time of credit of income to payee account or at the time of payment, whichever is earlier. If the payee of the amount credits the amount to be paid to “suspense account” or any other account, it is considered as ‘deemed payment’ and the payer must deduct TDS on such credit.
Deductor should deduct TDS u/s 194 at the rate of 10% if the dividend amount exceeds Rs. 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 of the tax deducted while filing 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.
Investors/traders, TDS rates on dividend u/s 194 (Equity) & 194K (Mutual Funds) slashed by 25% (i.e from 10% to 7.5%) for remainder of FY 2020-21.— Quicko (@HowToQuicko) May 13, 2020
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 on the dividend at 20% on equity shares and equity mutual funds. Therefore, TDS has to be deducted at 10% as per Sec 194 and Sec 194K for an NRI shareholder.
DDT is the tax paid on declaration, distribution or payment of dividend 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, the Budget 2020 applicable 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 Rs. 5000.