Section 194 Of The Income Tax Act: Exceptions And Rate Of TDS

Income Tax

Individuals having a decent understanding of the stock market purchase shares of big companies often to earn regular income through dividends. 

Section 194 of Income Tax Act, India deals with the tax deduction on income generated through such dividend stocks. 

This article comprises all the relevant information regarding this particular section of IT Act, including the tax rate, exceptions, and more. Read on to know it all!

Requirements Related to TDS deduction u/s 194  

A principal officer working for an Indian organisation that has made certain arrangements related to the payment as well as a declaration of dividends to a shareholder shall deduct TDS. The principal officer should be a resident of India to be eligible for deducting tax at source. 

So, when should it be deducted?

Tax needs to be deducted in case of either of the following (whichever is earlier):

• When the amount is credited to the payee’s account
• When the payment of a dividend is being made

Also Read – Deductions Available Under Section 80 Of The Income Tax Act

What Is the TDS Rate u/s 194?

Under Section 194 of Income Tax Act, the rate at which the tax needs to be deducted is 10%. However, this only applies to individuals who are furnishing their PAN to a deductor. Note that w.e.f May 14 2020 to March 31 2021, the tax rate was 7.5%. 

On the other hand, for individuals who are not able to furnish their permanent account number to deductors, TDS should be deducted at a rate of 20%.

Exceptions Related to TDS Deduction u/s 194

Here are certain circumstances as per Section 194 of IT Act under which TDS deduction on dividends will not be applicable for shareholders:

• If dividend income is covered u/s 115-O.
• If one makes the payment of the dividend to GIC, LIC or any of its subsidiaries. The same will be applicable in case you pay it to other insurers in respect of the shares they own.
• In case one makes the payment of the dividend via cheque to the payee, and this amount does not go beyond Rs. 2500. 
• In case your annual revenue is below the taxable limit, and you have declared that in Form 15G/15H.

Additionally, you need to know that the provisions of Section 194 will not be applicable in case such income is paid to any ‘business trust’. You can find such norms in Section 2, clause (13A) of ITA.

Also Read – Section 44AE Of The Income Tax Act

Final Word

In addition to all these norms of Section 194 of Income Tax Act, you must know when TDS will and won’t be applicable to resident individual shareholders. For instance, TDS will not be applicable in case the dividend amount does not cross Rs. 5,000. So, make sure to go through all such information and conditions to avoid confusion. 

Frequently Asked Questions 

What is the TDS rate for non-resident shareholders?

For non-resident shareholders, other than foreign portfolio investment (FPI), the rate of TDS will be 20%, along with the applicable surcharge. Additionally, you should also know that the surcharge can be a maximum of 15% in this case. 

For lower or no TDS deduction, whom should the assessee contact?

Assessees must get in touch with the assessing officer by submitting an application for lower/zero TDS deduction. The officer issues a certificate u/s 197 after considering various provisions under rule 28AA of ITA.

Generally, TDS deduction does not apply in case one declares it in Form 15H/15G. What is the purpose of these forms?

Individuals should submit such forms to make sure that TDS deduction is not made on their income generated through dividends. Note that these forms come with a validity of one year. You need to resubmit them at the start of every FY. 

Does a cooperative society need to pay TDS u/s 194A? 

Under Section 194A of Income Tax Act, any cooperative society with an income of Rs. 50 crore, paying interest to its members must deduct TDS. This rule was introduced after the Finance Act, 2020 amendment. 

Is TDS deducted on dividends paid to mutual funds?

As per Section 10 clause (23D) of IT Act, TDS is not applicable on dividends that a mutual fund earns. However, such a mutual fund would have to provide a self-declaration to show that they are exempt from TDS under this section.

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.