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Tax implication on Dividend Income - TDS u/s 194

  • Writer: Asif Khichi
    Asif Khichi
  • Jul 18, 2021
  • 2 min read

Finance Act, 2020 has brought a major change in the taxability of dividend Income. Prior to 31st March, 2020, Dividend Income was taxed as follows:

  1. Domestic Company - Dividend Distribution Tax(DDT) @ 15% under section 115-O of IT Act, 1961 on dividend declared/distributed/paid by a Domestic Company to shareholders.

  2. Shareholders

  • Dividend from Domestic Company was exempted in the hands of shareholders under section 10(34) of IT Act, 1961.

  • Tax @ 10% was required under section 115BBDA for any dividend received by Resident shareholder in excess of 10 lakhs from a Domestic Company

Effective 1st April, 2020, Dividend Income shall be taxed as below:


Domestic Company

  • Section 115-O abolished, hence no DDT is required to be paid by Domestic Company.

  • TDS @ 10% shall be deducted on dividend declared/distributed/paid to Resident shareholders under section 194 of IT Act, 1961.

  • In case of Non-Resident Shareholders, TDS shall be deducted as per section 195 read with DTAA provisions(Double Taxation Avoidance Agreement)

Shareholder

  • Shareholders shall be responsible to pay tax on dividend income as per the applicable rates in force.

  • Section 115BBDA has been abolished since entire dividend income is now taxable in the hands of shareholders.

Section 194 of Income Tax Act, 1961


Domestic Company: means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends (including dividends on preference shares) payable out of such income .


Domestic Company shall deduct TDS @ 10% on any dividend declared/distributed/paid to Resident Shareholder.


Point of Taxation

TDS shall be deducted before making any payment/distribution of dividend by any mode.


Nature of Dividend: As per section 2 (22) (a to e) of IT Act, 1961


Threshold for TDS in case of an INDIVIDUAL shareholder.

  • dividend is paid by the company by any mode other than cash AND

  • the amount/aggregate of dividend distributed/paid or likely to be distributed/paid during the financial year to the shareholder, does not exceed 5,000 rupees

Non-Applicability of Section 194: TDS shall not be deducted if dividend paid to:

  • Life Insurance Corporation of India

  • General Insurance Corporation of India

  • any other insurer

  • a "business trust", as defined in clause (13A) of section 2, by a special purpose vehicle referred to in the Explanation to clause (23FC) of section 10;

  • any other person as may be notified by the Central Government in the Official Gazette in this behalf.

Form 15G and Form 15H

Resident Individual and HUF may submit form 15G or 15H to the Domestic Companies to ensure TDS is not deducted provided their income does not exceed basic exemption limit. for example 2.5 lacs.









 
 
 

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