Section 194 of Indian Income Tax Act

Section 194

Section 194 of the Income Tax Act, 1961 deals with the deduction of TDS on payment of dividends by a domestic company. This section covers only the payment of dividends to resident shareholders. Here, dividend includes dividend on equity shares or preference shares. The dividend is either deemed dividend or interim dividend. However, profits earned after the commencement of the winding up of a company are not dividends and the same are not the subject matter of any deduction of income tax at source.

Section 194 of Income Tax Act

As per this section, when an Indian company or a company which has made the designated arrangements for the declaration and payment of dividends in India; shall before making any payment in cash or before issuing any cheque or warrant; in respect of any dividend or before making any distribution or payment to a resident shareholder, of any dividend; within the meaning of sub-clause (a) or sub-clause (b) or sub-clause(c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income tax at the rate in force.

A deduction shall be made at 10% of the dividend. However, there is no deduction of tax if dividends are referred to in section 115O; which refers to dividend distribution tax. There is no tax deduction in respect of any dividend which the company pays, in the case of individual shareholder, if;

  • The company distrubutes/pays or likely to distribute/pay the amount of dividend to the shareholder; which is less than or equal to Rs. 2500.
  • The company pays dividend by an account payee cheque.

Here, a ‘shareholder‘ refers only to a holder of shares and not to a registered shareholder. Thus, this section even consider them as a holder of shares who holds share warrants & not registered in the books of the company.

Exceptions to section 194

Section 194 does not apply to the following incomes credited or paid to;

  • LIC of India established under the Life Insurance Corporation Act, 1956; in respect of any shares owned by it or in which it has full beneficial interest.
  • GIC of India formed by virtue of the schemes framed U/S 16(1) of the General Insurance Business Act, 1972; in respect of any shares owned by the corporation or such company or in which the corporation or such company has full beneficial interest.
  • Any other insurer in respect of any shares owned by it or in which it has full beneficial interest.

Here, a shareholder can get no deduction or deduction at a lower rate; by filing Form 13 and providing the same to an assessing officer. With effect from 1st April 2010, the assessing officer shall not grant a certificate; unless the application in Form 13 contains the PAN of the applicant. In case, if the PAN is wrong or does not belong to the applicant; it will be deemed that the deductee has not furnished his PAN. Even the certificate would cease to be valid; if the person mentioned in the certificate transfers the shares to any other person.

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