Section 194 of the Income Tax Act requires Indian companies to deduct TDS at 10% before paying dividends to resident shareholders. Introduced in its current form after the abolition of the Dividend Distribution Tax (DDT) by the Finance Act 2020, Section 194 has been one of the most frequently misapplied TDS provisions — particularly by private limited companies paying dividends to their promoters and investors. This guide explains the exact rules, who must deduct, when, at what rate, and how investors can avoid excess TDS using Form 15G or 15H.
Section 194 at a Glance (FY 2025-26)
| Parameter | Details |
|---|---|
| Section | Section 194 — TDS on Dividends |
| Who must deduct? | Indian domestic companies (Private Ltd, Public Ltd) paying dividends to resident shareholders |
| TDS Rate | 10% (if PAN furnished); 20% if PAN not furnished (Section 206AA) |
| Threshold limit | ₹5,000 per shareholder per financial year |
| When to deduct? | At the time of payment or credit — whichever is earlier |
| Due date for deposit | Within 7 days from end of month of deduction (30 April for March) |
| TDS Return | Form 26Q — quarterly |
| TDS Certificate | Form 16A — within 15 days of due date of return |
Who Is Covered — And Who Is Exempt?
| Payee Type | TDS Applicable? | Notes |
|---|---|---|
| Resident Individual (PAN furnished) | Yes — 10% | If dividend > ₹5,000/year from that company |
| Resident Individual (no PAN) | Yes — 20% | Section 206AA applies |
| HUF | Yes — 10% | Same threshold as individuals |
| Domestic Company | Yes — 10% | Can submit Form 15G if dividend income is below taxable limit |
| Mutual Fund (Section 10(23D)) | No | Exempt under Section 196 |
| LIC, GIC, subsidiaries | No | Exempt under Section 196 |
| NRI / Foreign Company | Section 195 applies — not Section 194 | Rate per DTAA or 20% — whichever is beneficial |
| Shareholders submitting Form 15G/15H | No | Subject to eligibility (see below) |
Form 15G and 15H — How Investors Can Avoid TDS
Shareholders who do not expect their total income to exceed the basic exemption limit can submit self-declarations to avoid TDS deduction:
- Form 15G — for individuals below 60 years and HUFs. Total income must be below the basic exemption limit (₹2.5 lakh under old regime / ₹3 lakh under new regime). Also, the total dividend income from all sources must not exceed the basic exemption limit.
- Form 15H — for senior citizens (60 years and above). Only condition: estimated tax liability for the year must be NIL.
These forms must be submitted to the company before the dividend is paid. The company is then not required to deduct TDS on dividends paid to that shareholder for that FY. The company must file these declarations with the Income Tax department in Form 15G/15H quarterly returns.
TDS Compliance Calendar for Section 194
| Activity | Due Date |
|---|---|
| Deduct TDS at time of dividend payment | At time of payment / credit |
| Deposit TDS to government | 7th of following month (30 April for March deductions) |
| File Form 26Q (Q1: Apr–Jun) | 31 July |
| File Form 26Q (Q2: Jul–Sep) | 31 October |
| File Form 26Q (Q3: Oct–Dec) | 31 January |
| File Form 26Q (Q4: Jan–Mar) | 31 May |
| Issue Form 16A to shareholders | Within 15 days of 26Q due date |
Impact on Shareholders — Dividend Income Taxability
Post DDT abolition, dividends received are taxable in the hands of shareholders at their applicable slab rate. The TDS deducted u/s 194 is available as a credit in the shareholder's ITR via Form 26AS / AIS. Shareholders should ensure their dividend income is correctly disclosed in Schedule OS (Other Sources) of their ITR — it is pre-filled from AIS but must be verified for accuracy.
If TDS has been deducted in excess of actual tax liability (e.g., a senior citizen in the 0% slab), they can claim a refund by filing their ITR correctly.
"Every private limited company declaring dividends must run a TDS compliance check before payment — the ₹5,000 threshold makes it easy to overlook small distributions that still legally require deduction."
Penalties for Non-Compliance
- Failure to deduct: Interest at 1% per month from date of payment to date of deduction (Section 201(1A))
- Failure to deposit after deduction: Interest at 1.5% per month from date of deduction to date of deposit
- Late filing of 26Q: ₹200 per day (Section 234E) up to the TDS amount
- Non-filing penalty: ₹10,000 to ₹1,00,000 under Section 271H
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Written by CA Karan Shah
Founder of KC Shah & Associates, CA in Andheri, Mumbai. Taxation specialist advising Indian companies and investors on TDS compliance, ITR filing, and tax planning.