Since dividends became taxable in the hands of shareholders in 2020, companies and mutual funds have been required to deduct TDS before crediting your dividend payout. Here's how Section 194 works and how to make sure the tax deducted matches what's reflected in your ITR.
Section 194 of the Income Tax Act requires an Indian company to deduct TDS before paying dividends to a resident shareholder. This applies to dividends on equity shares declared, distributed, or paid by domestic companies. It does not apply to dividends paid to mutual funds or to dividends covered separately under Section 194K (dividend from mutual fund units).
TDS under Section 194 is deducted at 10% if the total dividend paid or payable to a shareholder during the financial year exceeds Rs 5,000. If the dividend amount is Rs 5,000 or less in a year, no TDS is deducted - but the income is still fully taxable in your hands.
| Particulars | Details |
|---|---|
| TDS Section | 194 (dividend from domestic company) |
| TDS Rate | 10% (20% if PAN not furnished) |
| Threshold | Rs 5,000 per financial year, per company |
| Applicable to | Resident individuals, HUFs, firms holding equity shares |
| Mutual fund dividends | Covered under Section 194K, same 10% rate, Rs 5,000 threshold |
Dividend income is taxed as Income from Other Sources at your applicable slab rate - there is no special concessional rate for dividends (unlike long-term capital gains). A high-income taxpayer in the 30% bracket pays 30% tax on dividend income, even though only 10% TDS was deducted, leaving a balance payable at the time of filing the ITR.
You can claim a deduction for interest expense incurred to earn dividend income (e.g., interest on a loan taken to buy shares), but this deduction is capped at 20% of the dividend income. No deduction is allowed for any other expense, including commission or collection charges.
If your total income is below the basic exemption limit, you can submit Form 15G (for individuals below 60) or Form 15H (for senior citizens) to the company or its RTA (registrar and transfer agent) to avoid TDS deduction altogether. This is commonly used by retirees and individuals with no other taxable income.
Every dividend TDS deduction is reported by the company to the Income Tax Department and reflected in your Form 26AS and Annual Information Statement (AIS). Before filing your ITR, cross-check the dividend amounts and TDS figures in AIS against your demat account statements and bank credits - mismatches are a common trigger for tax notices.
Since dividend income is often unpredictable (companies declare dividends at board discretion), the Income Tax Act provides relief: advance tax interest under Section 234C is not charged on dividend income if the shortfall in advance tax is paid in the immediately following installment, as long as the dividend was received after the due date of an earlier installment.