Decoding Section 194 - TDS on dividend

Finance Act, 2020 has amended the provisions of section 194 of the Income Tax Act, 1961 (“Act”) to provide for TDS on Dividend income declared, distributed and paid by a domestic company which was earlier exempt from income tax under section 10(34) subsequent to the abolishment of DDT (dividend distribution tax) on the dividend amount declared by a domestic company.

Finance Act 2020 has also withdrawn the exemption from dividend income from the financial year 2020-21.

1. How would this affect me?

• If you are resident individual shareholder who is in receipt of dividend exceeding Rs. 5,000 in a fiscal year, entire dividend will be subject to TDS.
• If the dividend to a resident individual shareholder does not exceed Rs 5,000 in a fiscal year, no TDS is applicable.
• If you as a  resident individual shareholder provides declaration in Form 15G/ Form 15H, no TDS is applicable.

2. What would be the rate of TDS?

The rate of TDS on dividend income u/s 194 is 10%

The government has announced a relief due to outbreak of COVID-19 pandemic and effective from 14.05.2020 the rate of TDS on dividend u/s 194 is reduced to 7.5% instead of 10%. The reduced rate of TDS on Dividend u/s 194 shall be applicable up to 31.03.2021.

However, if the shareholder does not provide PAN or Aadhaar Number to the company or provides invalid PAN or Aadhaar Number then the rate of TDs shall be increased to 20% as per section 206AA. In this case, the relief shall not be applicable.

3. When would tax be required to be deducted on TDS income ?

Tax shall be deducted on dividend income before making the payment of dividend to the resident shareholders by any mode including cash. In case the recipient shareholder is a non-resident shareholder then tax shall be deducted under section 195.

Thus, the tax shall be deducted at the time of making payment of dividend to the shareholders and not when the dividend is declared.

4. Are dividend to Preference shares also covered?

Section 194 explicitly covers dividend paid to preference shareholders besides, dividend on equity shares.

5. What about dividend paid to the insurance companies and Mutual fund?

TDS is not applicable on the dividend paid to the insurance companies in case it provides a self-declaration that the shares are owned by it and it has full beneficial interest along with a self-attested PAN.

Further, TDS is not applicable on the dividend paid to a Mutual Fund specified under clause (23D) of section 10 of Income Tax Act, 1961. Such Mutual Fund should provide a self-declaration that they are specified in Section 10 (23D) of the Income Tax Act, 1961, self-attested copy of PAN card and registration certificate.

6. TDS applicablility to Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs)

Tax shall be deducted at source @ 20% (plus applicable surcharge and cess) on dividend paid to Foreign Institutional Investors (“FIIs”) and Foreign Portfolio Investors (“FPIs”) in view of specific provision under section 196D of the Income tax Act 1961.

Readers should note that there is no threshold provided for which no tax will be withheld. Entire dividend is subject to withholding of tax.

7. TDS applicablility to non-resident shareholders other than FIIs/ FPIs:

For non-resident shareholders, the rate of withholding tax is 20% (plus applicable surcharge and cess) as per Indian Income- tax Act, 1961. However, where a non-resident shareholder is eligible to claim the tax treaty benefit, and the tax rate provided in the respective tax treaty is beneficial to the shareholder, then the rate as per the tax treaty would be applied. In order to avail tax treaty benefits, non-resident shareholders would be required to submit ALL the below documents:

• Tax Residency Certificate for FY 2020-21, the year in which the dividend is received (to be obtained from the Revenue / Tax authorities of the country of which the shareholder is resident)
• Form 10F as per the format specified under Income Tax Act, 1961
• Copy of PAN Card attested
• Self-declaration of beneficial ownership and not having a PE in India.

It may be pertinent to note that the Company is not obligated to apply the beneficial DTAA rates at the time of tax deduction/withholding on the dividend amount. Application of beneficial DTAA Rate shall depend upon the completeness and satisfactory review by the Company, of the documents submitted by the non- resident shareholder.

In case the documents are not provided or are insufficient to apply the beneficial DTAA rates, then tax will be deducted at 20% including surcharge and cess @ 4%

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