TDS ON DIVIDEND UNDER SECTION 194 OF THE INCOME TAX ACT

TDS U/S 194: TDS ON DIVIDEND & ITS APPLICABILITY

1. What do you mean by TDS?

TDS stands for Tax Deducted at Source. TDS is a kind of tax that is deducted by the payer before making certain payments like Salary, Rent, Commission, Interest, Royalty, Professional Fees etc. to the payee.

TDS is required to be deducted at the source if the money to be paid and the money already paid exceeds a specified amount.

The Payee can claim this tax deducted by the payer while paying his income tax liability for the year, and if the TDS deducted is more than the income tax liability of the assessee then he/ she will be entitled to a refund.

The main purpose of introduction of TDS was to reduce the Tax evasion by the person receiving the income.

Note: -

Payer- A payer is a person or organization who is responsible for deducting TDS before paying the amount to Payee.

Payee- A Payee is a person or organization who receives the payment from the payee after the TDS deduction.

2.  What is TDS under Section 194 of Income Tax Act?

Section 194 of Income Tax Act, 1961 mandates the TDS on payment of Dividend means any income received by a shareholder from a company which is in the nature of the Dividend is liable to the provisions of TDS under section 194.

3. What is Dividend?

As per Income Tax Act dividend means: -

• Section 2(22)(a) Any distribution of assets by a company to its shareholders, to the extent the company possesses accumulated profits (whether capitalized or not).
• Section 2(22)(b) Any distribution of Debentures, Debentures stock or deposit certificate and any distribution to its preference shareholders of shares by way of bonus, to the extent the company possesses accumulated profits (whether capitalized or not).
• Section 2(22)(c) Any distribution of assets by a company on liquidation, to the extent the company possesses accumulated profits (whether capitalized or not).
• Section 2(22)(d) Any distribution to its shareholders by a company on reduction of its capital to the extent company has accumulated profits (whether capitalized or not).
• Section 2(22)(e) Loans or advance by any closely held company.

4. When is TDS deducted under section 194?

Normally the TDS is to be deducted at the time of payment or at the time of crediting the party in the books of accounts whichever is earlier, but in case of TDS u/s 192 the TDS must be deducted at the time of payment only.

Few examples of date of deduction are: -

5. Who is required to deduct TDS under Section 194?

Income Tax Act mandates that the principal officer of an Indian company is required to deduct TDS at the required rate before making payment of dividend to resident person.

NOTE:

This section i.e. TDS on Dividend is not applicable to making such payments to non-resident.

6. Rate of TDS under Section 193?

The TDS rate under Section is 10%, however in case the payee is unable to furnish his/ her PAN then the TDS will be deducted at 20%.

Example: -

Hindustan Uniliver Limited (HUL) declares dividend of Rs. 20 per share to its shareholders. Mr Arjun holding 1000 shares is entitled to receive Rs. 20*1000= 20,000 as dividend income from HUL. The principal officer of HUL is therefore required to deduct TDS @10% i.e. 2000 while making payment of TDS to Mr. Arjun.

7. Exemption under Section 194?

No TDS under Section 194 if: -

• Payment is made to non- resident.
• Payment is made to an Individual by any mode other than cash and payment is up to Rs. 5000 in a P.Y.
• Payment is made to LIC, GIC or any other insurer provided the shares are owned by them, or they have full beneficial interest in such shares.
• Payment is Paid/ Credited by Special Purpose Vehicle (SPV) to business trust.

NOTE: -

Special purpose vehicle (SPV) is a separate legal entity created by an organization. The SPV is a distinct company which has its own Assets and Liabilities, as well as its own legal status. Usually, they are created for specific objective, often to isolate risk.

8. Time limit for deposit of TDS under Section 194?

The due date for deposit of TDS is as below: -

9. What is the due date for filing of TDS return under Section 194?

TDS is to be deposited monthly on the dates mentioned above but the return is to be filed quarterly on or before the below mentioned dates: -

10.  Type of TDS return & form to be issued?

TDS under this section has to filed quarterly through FORM 26Q and the deductor has to issue FORM 16A to the employee after filing of return.

11.  Fees/ Penalties for Late/ Non- Filing of TDS u/s 194?

Following penalties/fees will be levied if there is delay in TDS deduction or delay in deposit of TDS or non-filing of quarterly return.