Understanding TDS on Dividend Payments for FY 2020-21 Onwards

Applicability of Section for Financial Year 2020-21 Onwards

This section applies from 1st April 2020 for the financial year 2020-21 and subsequent years.

Legal Framework for TDS on Dividend Payments

The principal officer of an Indian company, or any company that has established the required arrangements for the declaration and payment of dividends within India, must adhere to the following provisions before making any dividend payments or distributions to shareholders residing in India. The company must deduct income tax at a rate of ten percent from the total dividend amount, which includes dividends on preference shares, as defined in sub-clauses (a), (b), (c), (d), or (e) of clause (22) of section 2.

Exemptions from Deduction: A deduction is not required for individual shareholders under the following conditions:

The dividend is paid by means other than cash; and
The total dividend amount distributed or likely to be distributed during the financial year to the shareholder does not exceed ₹5,000.

Further Exemptions: This section does not apply to income credited or paid to:

The Life Insurance Corporation of India, as established under the Life Insurance Corporation Act, 1956, for shares owned or beneficially held by it.
The General Insurance Corporation of India or any of the companies formed under the General Insurance Business (Nationalisation) Act, 1972, for shares owned or beneficially held by them.
Other insurers for shares they own or beneficially hold.

Understanding Tax Deduction at Source (TDS)

Deductor:
The company responsible for distributing dividends to equity share investors must deduct TDS from such dividends. This deducted TDS must be deposited, and the company is required to file the TDS Return via TRACES.

Deductee:

Resident shareholders receiving dividends on equity shares will receive the amount post-TDS deductions under Section 194.
Resident shareholders earning dividends from equity mutual funds will have TDS deducted under Section 194K.
Non-Resident Indian (NRI) investors will receive their dividend income after TDS is deducted under Section 195.

Payment Details

Nature of Payment

Section 194 applies to dividends on equity shares paid to resident shareholders when the total amount exceeds ₹5,000 within a financial year.

Timing of TDS Deduction

TDS is to be deducted:

At the time of crediting the income to the payee’s account, or
At the time of actual payment, whichever occurs first.

If the amount is credited to a "suspense account" or a similar account, it is considered as 'deemed payment', necessitating TDS deduction on that credit.

Rate of TDS

The deductor must deduct TDS at 10% under Section 194 when the dividend exceeds ₹5,000. If the payee fails to provide their Permanent Account Number (PAN), TDS must be deducted at 20%.

TDS Certificate

The deductor is required to issue Form 16A to the deductee as a Tax Credit Certificate reflecting the TDS amount deducted. This form can be downloaded from the TRACES account. The deductee can then use Form 16A to claim credit for the deducted tax when filing their Income Tax Return.

Filing TDS Return

Upon depositing the TDS with the income tax department, the deductor must file Form 26Q on TRACES. This form includes details of the dividend payments made. After filing, the deductor should provide Form 16A to the deductee.