Tax at source (TDS) must be deducted from dividends paid by Indian companies to resident shareholders according to Section 194 of the Income Tax Act 1961. Before giving out dividends over ₹5,000 the company has to take 10% TDS out. This section makes sure that taxes are paid and cuts down on tax evasion. But there are some exceptions, like for small dividend amounts and certain types of companies like LIC and GIC.
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Who Is Responsible for Deducting TDS?
Under Section 194, the principal officer of an Indian company must deduct tax at the source when paying dividends to resident shareholders. The tax must be deducted before making any payments to shareholders. It applies to all Indian companies, including those paying dividends on preference shares.
TDS Rate under Section 194 of Income Tax Act
Section 194 says that 10% of the amount of the dividend paid is taxed. In other words, if a company gives a shareholder a ₹1,000 dividend, it will first take ₹100 out as tax and then give the shareholder the rest ₹900.
Conditions for TDS Deduction
TDS must be deducted by the company in the following circumstances:
The dividend paid is in cash.
The amount of dividend exceeds ₹5,000 in a financial year. If the dividend amount is below ₹5,000, no TDS is deducted.
Exemptions from TDS
There are certain cases where TDS under Section 194 is not applicable:
1. Dividend paid by modes other than cash: If the dividend is paid in ways other than cash, no TDS will be deducted.
2. Small dividend amounts: If the total dividend paid to a shareholder does not exceed ₹5,000 in a financial year, no TDS will be deducted.
3. Exempted entities: By giving exemptions, the government makes sure that it doesn't collect tax from people and businesses that don't need to be. The exemptions are
Life Insurance Corporation (LIC): LIC is exempt when receiving dividends for shares it owns.
General Insurance Corporation (GIC): GIC and its subsidiaries are exempt when receiving dividends on shares they hold.
Other insurers: Insurers that hold full beneficial interest in the shares are also exempt.
Business trusts: These are exempt when receiving dividends from special purpose vehicles.
Timing of TDS Deduction
The company has to take out TDS either when it pays the dividend or credits the account, whichever comes first. A company might declare a dividend in March but pay it in April. When the dividend is credited to the shareholder's account in March the company will have to take out the TDS.
Payment of TDS
Once the TDS is deducted, the company must deposit it with the government. TDS must be deposited before the 7th day of the next month for amounts deducted in April to February. For amounts deducted in March, it should be deposited by April 30th.
Forms for Claiming TDS Refund
The shareholder can get their money back if they do not make enough to be taxed or if the amount of tax they paid is more than what they owe. This is something you can do when you send in your tax return.
Key Provisions to Remember
Exemption for small dividend amounts: No TDS is deducted if the dividend is less than ₹5,000.
Exemption for non-cash dividends: If the dividend is paid in non-cash form, no TDS is deducted.
Special provisions for certain entities: LIC, GIC, insurers, and business trusts are exempt from TDS.
TDS Rate: The rate is 10% for resident shareholders.
Filing for refunds: Shareholders can file for a refund if excess tax is deducted.
Impact on Companies and Shareholders
Section 194 makes sure that companies follow the rules for tax deduction at source. Before making payments to shareholders the company needs to be careful to figure out and deduct TDS. Also businesses should keep good records to show that TDS was taken out and given to the government.
For shareholders, TDS acts as an advance tax payment. If the shareholder’s income falls below the taxable limit, they can claim the deducted tax as a refund while filing their annual income tax return. However, shareholders need to be aware of the TDS deductions and check the amount to ensure proper tax compliance.
Penalties for Non-Compliance
A business may have to pay fines if it does not deduct tax at source (TDS) or if it does not deposit money with the government on time. On top of that the company may have to pay interest on the tax that was not paid. In order to avoid fines it is important to make sure that TDS is deducted and paid on time.
Summing Up
Section 194 of Income Tax Act says how taxes should be paid on dividend income. It makes sure that tax is taken out at the source which makes tax evasion less likely. Companies must deduct TDS on dividends over ₹5,000 but some groups and small dividend amounts are not required to do so. This part of the law is good for shareholders because it lets them pay their taxes early. But both companies and shareholders must continue to carefully follow the rules to stay out of trouble and make sure they are following tax laws.
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Section 194 of the Income Tax Act: FAQs
Q1. What is Section 194 of Income Tax Act?
Section 194 of the Income Tax Act, 1961 requires deduction of tax at source (TDS) on dividends received by Indian companies from their resident shareholders.
Q2. What is the TDS rate under Section 194?
The TDS rate under Section 194 is 10% of the dividend.
Q3. Are there any exemptions for TDS under Section 194?
Yes, there are exceptions for dividend payments in kind, dividends less than ₹5,000, and payments to certain entities such as LIC, GIC, and business trusts.
Q4. When is the TDS deducted under Section 194?
The TDS is deducted when payment or credit of the dividend, whichever is earlier, is made.
Q5. Are shareholders eligible to claim refund of TDS deducted?
Yes, if the income of the shareholder is less than the taxable limit or the TDS deducted is more than the tax liability, then they can get a refund while submitting their tax returns.
