What is Section 194 of the Income Tax Act

Quick Overview

• Section 194 of the Income Tax Act sets the rule for TDS on dividends paid by a domestic (Indian) company to resident shareholders on equity share dividends (non-residents are handled under Section 195, not Section 194).
• TDS triggers only after the annual threshold is crossed: from FY 2025–26, TDS applies when total dividends to a resident shareholder exceed ₹10,000 in a financial year (earlier it was ₹5,000).
• The TDS rate is straightforward: 10% when PAN is available and 20% when PAN is not furnished (the higher rate applies due to PAN non-availability).
• Timing matters: the company deducts TDS at the time of payment or credit (whichever is earlier), so TDS can apply even if the amount is credited before it is actually paid.
• Deposit and compliance: TDS is generally deposited by the 7th of the next month, and for March deductions, by 30th April; the company also reports it in TDS returns, and shareholders can see credit in Form 26AS/AIS and claim it in the ITR.

Dividend income feels simple on the surface. A company declares a dividend, you receive money, done. But tax law doesn’t let it stay that clean.

Section 194 of the Income Tax Act is the rule that tells a domestic company when it must deduct TDS on dividends before paying resident shareholders. It’s a crucial compliance rule for the company.

What is Section 194 of the Income Tax Act?

Section 194 requires a domestic (Indian) company to deduct Tax Deducted at Source (TDS) on dividends paid to resident shareholders before the dividend is actually disbursed.

So, if you’re a resident shareholder and you receive dividends from an Indian company, Section 194 is usually the reason you see a TDS entry against that payout (when applicable).

This section applies specifically to dividends on equity shares paid to residents. If the shareholder is non-resident, the TDS rules move to Section 195, not Section 194.

Meaning of Section 194

Section 194 is the TDS-on-dividend rule for residents, where the company deducts tax first, then pays you the net dividend.

It exists to ensure that dividend income doesn’t slip outside the tax system. With dividends being taxable in shareholders’ hands, TDS becomes the tracking and collection mechanism.

Must Explore: Health Insurance Plans

Purpose of TDS on Dividend

TDS on dividends serves three real-world purposes:

1. Tax collection happens upfront instead of waiting for year-end filing.
2. Dividend income becomes traceable via Form 26AS/AIS.
3. Compliance becomes standardised for companies distributing profits.

For shareholders, it also reduces unpleasant surprises because some tax is already paid on your behalf.
Suggested read: Why Your Financial Plan Should Include Health Insurance

What is TDS on Dividend Under Section 194 of the Income Tax Act?

Under Section 194, when a company pays you a dividend, and your annual dividend from that company crosses a threshold, it must:

• Deduct TDS, and
• Pay you the net amount, and
• Report the deduction in the TDS system.

You still have to show the gross dividend in your return and then claim the TDS credit.

So the flow is:

Dividend declared - TDS deducted (if applicable) - Net dividend paid - TDS credit shows up in Form 26AS/AI.

Who is Required to Deduct TDS Under Section 194?

Domestic Company

Any Indian company paying dividends to resident shareholders.

That includes:

• Listed companies
• Unlisted companies
• Private limited companies
• Public companies

As long as it’s a domestic company and the payment is a dividend to residents, Section 194 becomes relevant.

Conditions for Deduction of TDS Under Section 194

TDS under Section 194 typically kicks in when these conditions line up:

• Dividend is paid by a domestic company
• Dividend is paid to a resident shareholder
• The threshold limit is crossed in the financial year
• Payment/credit happens during that year

If any of these don’t apply (like a non-resident shareholder), Section 194 won’t be the governing provision.

TDS Rate Under Section 194 of Income Tax Act

Here’s the clean rule:

• 10% TDS when PAN is available
• 20% TDS when PAN is not furnished

This is one of those areas where not having PAN hurts immediately. The company doesn’t “choose” the higher rate; law enforces it.

Suggested read: Tax Benefits of Health Insurance Under Section 80D

Threshold Limit for TDS Deduction Under Section 194

This is where many investors get confused, because the threshold changed.

• Earlier threshold: ₹5,000
• Updated threshold: ₹10,000

Meaning, TDS applies only when the total dividend paid to a resident shareholder exceeds ₹10,000 in a financial year.

When is TDS to Be Deducted Under Section 194?

At the time of credit or payment — whichever is earlier

That means:

• If the dividend is credited in the company’s books today but paid next week, TDS happens today.
• If the dividend is paid instantly, TDS happens at the payment.

Time Limit to Deposit TDS Collected Under Section 194

Once the company deducts TDS, it has to deposit it with the government on time.

As per the resource:

• By the 7th of the following month (for most months)
• For March deductions, the deposit is due by 30th April

Exceptions to TDS Deduction Under Section 194 of the Income Tax Act

Not every dividend payout results in TDS, even if it’s dividend income. Common cases where TDS under Section 194 may not apply include:

1. Dividend below the annual threshold (₹10,000 as per the shared rule)
2. Certain specified entities, such as LIC, GIC, and insurers, in the specific context stated (shares owned/beneficially held by them)

Exemption for Certain Shareholders

This is where Form 15G / Form 15H becomes a big deal.

If your total income is such that your tax liability is nil (as per the conditions), you can submit declarations so that the company doesn’t deduct TDS.

Non-Applicability in Specified Cases

• Non-resident shareholder: not Section 194, it’s Section 195.
• Dividend payouts that don’t cross the threshold: no TDS under Section 194 based on the threshold rule shared.

Deemed Dividend Explained Under Section 2(22) of Income Tax Act

Section 2(22)(a) – Distribution of Assets as Deemed Dividend

If a company distributes accumulated profits through assets, it may be treated as a dividend to the extent of accumulated profits.

Section 2(22)(b) – Distribution of Debentures as Deemed Dividend

Certain distributions involving debentures/debenture stock/deposit certificates can fall here.

Section 2(22)(c) – Distribution on Liquidation as Deemed Dividend

If, on liquidation, shareholders receive distributions out of accumulated profits, it can become a deemed dividend to that extent.

Section 2(22)(d) – Distribution on Reduction of Share Capital

If the company reduces capital and distributes amounts that are effectively accumulated profits, it can be treated as a dividend.

Section 2(22)(e) – Loans and Advances by Closely Held Companies

 If a closely held company gives a loan/advance to certain significant shareholders (or to concerns linked to them) and it’s out of accumulated profits, it can be treated as a deemed dividend.

But not every advance is deemed a dividend. Courts have held that only advances that carry the character of a loan/repayment obligation fit; trade advances in normal business can be outside this.

Role of Form 15G and Form 15H Under Section 194

These forms exist to stop unnecessary TDS deductions when your tax liability is nil.

What is Form 15G?

• For resident individuals below 60
• Also available for HUFs, trusts, and others (not companies/firms)
• Can be submitted only if the estimated income is below the basic exemption limit (as per the rule stated in your resource)

What is Form 15H?

• For resident senior citizens (60+)
• Can be submitted only if the total tax liability is nil

Why these forms matter in dividend TDS

If you’re eligible and submit them correctly, dividends can be paid without TDS (subject to conditions and acceptance).

When Can Form 15G Be Submitted?

Submit Form 15G at the beginning of the financial year so TDS doesn’t start getting cut, and then you chase refunds later. These forms may be submitted quarterly to the deductor in the prescribed manner.

When is Form 15H Applicable?

Form 15H applies when:

• You’re a resident senior citizen
• Your tax liability is nil for the year (even if income is above basic exemption, but tax becomes nil due to deductions/rebates, depending on your tax situation)

Adjustment of Short Deduction or Excess Deduction of TDS

Companies may sometimes deduct slightly more (excess) or slightly less (short) TDS. The general compliance approach is:

• Correct it within the financial year through adjustments in subsequent payments, where permitted.
• Ensure accurate reporting in TDS returns.

For shareholders, the immediate impact is on:

• How much net dividend do you receive
• How much credit shows in Form 26AS/AIS

Suggested read: Reduce Your Financial Risks with Health Insurance Investment

TDS Return and Reporting Under Section 194

Companies that deduct TDS under Section 194 must typically:

• Deposit TDS on time
• File quarterly TDS returns (commonly through Form 26Q for resident payments)
• Issue a TDS certificate (commonly Form 16A) so shareholders can claim credit

Even if you don’t physically receive a certificate, you’ll see the credit in Form 26AS/AIS once properly filed.

Credit of TDS Deducted Under Section 194

This part is important for your ITR:

• You report the gross dividend income
• You claim TDS credit already deducted

Where you’ll see it

• Form 26AS
• AIS (Annual Information Statement)

If the TDS isn’t reflecting, it’s usually because:

• PAN mismatch, or
• The deductor hasn’t filed/processed a return, or
• Wrong details in the filing
  
  Suggested read: The Financial Implications of Not Having Health Insurance in Times of Distress

Difference Between Section 194 and Section 194A

People mix these up because both are common TDS sections.

• Section 194 reflects TDS on dividends
  
  
• Section 194A outlines TDS on interest (other than interest on securities), like bank FD interest

So if your bank is cutting TDS on interest, that’s generally 194A. If your company is cutting TDS on dividends, that’s Section 194.

Common Mistakes in TDS Deduction on Dividend

These are the mistakes that cause the most friction:

1. Not updating PAN with the company/RTA
2. Assuming only the amount above ₹10,000 is taxed
3. Not checking Form 26AS/AIS before filing ITR
4. Submitting Form 15G/15H late
5. Ignoring deemed dividend situations in closely held companies

Conclusion: Understanding Section 194 of the Income Tax Act

Section 194 of the Income Tax Act is not meant to complicate dividends. It’s meant to make sure dividend income is taxed cleanly and trackably.

If you’re a shareholder, your practical checklist is short:

• Make sure your PAN is updated
• Know the ₹10,000 threshold for dividend TDS (as per the shared rule)
• Check Form 26AS/AIS for TDS credit
• Use Form 15G/15H when you’re eligible and want to avoid unnecessary deductions
  
  Suggested read: You Need to Think of Health Insurance Right From When You Begin Your Financial Planning

Frequently Asked Questions (FAQs)

What is Section 194 of the Income Tax Act?

Section 194 is the provision that requires domestic companies to deduct TDS on dividends paid to resident shareholders when applicable.

Is TDS applicable to all dividend income?

Not always. As per the shared rule, TDS under Section 194 typically applies when dividends to a resident shareholder exceed ₹10,000 in a financial year (and subject to exceptions).

What is the TDS rate on dividends under Section 194?

10% when PAN is furnished, and 20% if PAN is not furnished.

Can shareholders claim a refund of excess TDS deducted?

Yes. You can claim credit/refund while filing your income tax return, based on the TDS appearing in Form 26AS/AIS.

What is the role of Form 15G and Form 15H under Section 194?

These forms allow eligible taxpayers to request non-deduction of TDS when their total tax liability for the year is nil, subject to conditions.