Section 194 of Income Tax Act

To speed up and effectively collect taxes, tax deductions at the point of earning income have been integrated into the Income-Tax Law. This procedure is referred to as "Tax Deducted at Source," or TDS.

When tax is subtracted from income depends on where it was earned. Tax is withheld from the payee by the payer, who then sends it to the government on the payee's behalf.

The terms of Section 194 of the Income Tax Act of 1961 have been modified by the Finance Act of 2020. Previously exempt from income tax under section 10, dividend income declared, distributed, and paid by a domestic corporation is now subject to TDS (34). This comes after the DDT (Dividend Distribution Tax) on the number of dividends declared by a domestic corporation was abolished.

What is Section 194?

Section 194 TDS of the ITA mandates that the principal officer of an Indian company (or a company that has made the required arrangements for the declaration and payment of deemed dividend in India) deduct tax at source from the amount of the dividend at the required rate prior to making any payment of dividend to a resident.

However, if the payer corporation is subject to dividend tax under Section 115-0 on such payment, the tax reduction is not necessary. 

In other words, TDS under Section 194 is not necessary if a dividend tax is imposed under Section 115-O of the ITA. Only when the dividend tax under Section 115-O does not apply is TDS under Section 194 necessary.

Deduction of Tax

The principal officer of the firm must deduct the tax owed on dividends at the applicable rates for a company that has made arrangements to declare and pay dividends within India or a company that already does so.

Tax is as soon as feasible deducted in the following situations:

  • Prior to the cash payment of any dividend.
  • Before writing a dividend check or warrant.
  • Before giving a shareholder any payment or distribution of a dividend, as defined by Section 2 (22).

Exemptions of TDS on payment of dividend

In the event of a shareholder (who is an individual), no tax deduction will be claimed under Section 194 when:

  • The dividend is paid by account payee check, and the total amount (whether paid individually or collectively during the financial year) is not to exceed Rs. 2500.
  • Section 115-O applies to dividends.
  • For shares that they hold or in which they have a full beneficial interest, the dividend is paid to LIC, GIC, or any of its subsidiaries, or to any other insurer.
  • When the income is below the taxable limit and you have submitted Form I5G/15H.

Form 15H

Form 15H or Form 15G can be used by taxpayers whose income is below the taxable threshold to avoid TDS at the source. If they are sixty years of age or over, individuals who are claiming specific receipts without deducting tax may file a declaration under sub-section (1C) of Section 197A of the Internal Revenue Code.

Form 15G

An individual or person (other than a company or a firm) may declare certain receipts without deducting tax under the provisions of subsections (1) and (1A) of Section 197A of the Internal Revenue Code.

Adjustments of Short Deductions

For the purpose of rectifying any excess or deficiency resulting from any prior deduction or failure to deduct throughout the financial year, the person responsible for making the payment at the time of making any deduction increases or decreases the amount to be deducted under Section 194A.

Time Limit to Deduct TDS

  • Tax withheld from April through February must be deposited no later than the seventh of the following month.
  • March taxes must be paid by April 30th or earlier.
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