Section 194 TDS of Income Tax Act: Learn who it applies to & its impact on Section 115-O

Last Updated : May 23, 2023, 4:09 p.m.

The Budget Act of 2020 modified the provisions of Section 194 of Income Tax Act of 1961. Dividends declared, divided, and paid by a domestic corporation previously exempt from Income Tax under Section 10 are now liable to TDS (34). The Dividend Distribution Tax or DDT on the number of dividends issued by a domestic firm was eliminated prior to this. Let’s examine Section 194 of Income Tax Act to ensure better adherence.

Tax savings at the point of earning income have been incorporated into the Income-Tax Code to expedite and effectively collect taxes. Tax Deducted at Source is the term used to describe this process.

Tax is deducted at different times depending on where the income was produced. The payer deducts tax from the payee and forwards it to the government on the payee’s behalf. This article aims to shed light on Section 194 of Income Tax Act.

How does Section 194 of Income Tax Act Work?

Before paying any dividend to a citizen, the principal executive of an Indian company (or a corporation that has made the necessary preparations for the proclamation and payment of deemed dividends in India) is required to subtract tax at source from the dividend at the required rate.

The tax reduction is not required if the payer corporation is, under Section 115-0, subject to Dividend Tax on such a payment.

Simply said, TDS under Section 194 of Income Tax Act is not required if a Dividend Tax is levied under Section 115-O of the ITA. According to Section 194, TDS is required only in the absence of the Dividend Tax under Section 115-O.

What Conditions are Required to Deduct TDS under Section 194 of Income Tax Act?

The tax on dividends covered by subclauses (a), (b), (c), (d), or (e) of clause 22 of section 2 must be deducted by the senior officer of a company that is in the process of declaring dividends (equity or preference or both) in India. Nevertheless, beginning on January 1, 2003, this TDS provision will only apply to dividends covered by Section 2(22)(e), as stockholders are not required to pay taxes on dividends covered by Section 2(22)(a), (b), (c), or (d).

What is the TDS Tax Rate under Section 194 of Income Tax Act?

10% is the rate for this part of  Section 194 TDS. TDS will be taken out at the time of payment (cash, check, draught, etc.) or at the time of credit, whichever comes first.

What are the TDS Deduction Exceptions under Section 194?

In the case of a shareholder, Section 194 TDS will not be used to secure a tax exemption. No tax deduction under Section 194 of the Income Tax Act will be made by a shareholder (who is an individual) in the following circumstances:

• The dividend’s overall amount (whether paid separately or together during the financial year) cannot exceed Rs. 2500 and is paid by account bearer check.
• Dividends are subject to Section 115-O.
• The dividend is paid to LIC, GIC, any of its subsidiaries, or any other provider in respect of shares in which they are beneficial owners or in which they have full beneficial interest.
• If your income falls below the taxable limit and you have submitted Form I5G/15H.

Form 15H

Taxpayers who make less than the taxable threshold can utilise Form 15H or Form 15G to avoid TDS at the source. Those claiming specified receipts without deducting tax and are sixty years of age or older may submit a declaration following subsection (1C) of Section 197A of the Internal Revenue Code.

Form 15G

The Internal Revenue Code’s subsections (1) and (1A) permit an individual or person (other than a corporation or a business) to declare certain revenues without subtracting tax.

Corrections to Short Deductions

The individual in charge of making the payment at the moment of making any deduction raises or reduces the amount to be deducted under Section 194 of Income Tax Act to make up for any excess or deficiency resulting from any preceding deduction or failure to reduce throughout the financial year.

Time Limit for TDS Deduction

From April through February, tax withheld must be deposited by the seventh day of the following month. Taxes for March are due on or before April 30.

Conclusion

The dividend received on equity shares that were formerly exempt is now subject to slab rates of taxation under Section 194 of Income Tax Act. TDS would be required because the income would be taxable in the shareholder’s hands. When issuing a dividend on equity shares, the company must deduct TDS per Section 194. If a resident shareholder receives more than Rs. 5,000 in dividends within a fiscal year, a deduction of 10% on the total amount of dividends is applicable. Beginning on April 1, 2020, or FY 2020–21, Section 194 of Income Tax Act is in effect.

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