A Complete Guide To Section 194 Income Tax Act

The Income Tax Laws have incorporated tax deductions at the time of earning to streamline and improve the efficiency of the tax collection process for taxpayers. The procedure in question is called Tax Deducted at Source (TDS). 

The Income Tax Act's Section 194 was modified by the Finance Act of 2020. Dividend income that a domestic corporation declared, disbursed, and paid was previously exempt under the Income Tax Act's section 10(34). Tax deductions on income from dividend stocks are covered under Section 194. 

The meaning of this section, including the tax rate, exceptions, and applicability, will be understood by taxpayers after reading this article. Regarding such dividend income, the tax deduction rate is 10%. TDS is not withheld, nevertheless, if the dividend payment is received in the form of checks and is up to ₹5,000. There exist more exclusions that will be discussed subsequently in this piece. To learn more, keep reading!

Know About TDS on Dividend Under Section 194

Let's face it, everyone enjoys dividends. Many of our friends and family purchase stock in major companies with the expectation of receiving substantial dividend payments. A dividend is just a shareholder's portion of the company's profits. If you have invested in a company's stock, you should strive to get a healthy return in the form of dividends or rising share prices. This is when section 194 comes into play. This clause requires that shareholders' dividend income be subject to a tax deduction at source (TDS). 

Please take note that domestic company taxpayers were subject to Dividend Distribution Tax (DDT) under section 115-O until Assessment Year 2020–21. As a result, section 194 did not apply to such dividend income and thus was not subject to tax deduction at source. The Financial Act 2020, on the other hand, eliminated DDT and replaced it with a more conventional tax structure in which investors pay taxes on their dividends.

Applicability of TDS in accordance with Section 194

When a domestic company's senior officer arranges for dividend payments to shareholders, the corporation is obligated to deduct taxes from the dividends that are dispersed or paid. For tax deduction at source to be available, the principal officer in question must be an Indian resident. After realizing that section 194 applies to you, it would be wise to take the next step and determine when such TDS should be withheld.

• When the payee receives the payment or,
• After the money is credited to the payee's account, whichever of the two occurred first.

Rate of Taxation Under Section 194

With regard to such dividend income, the TDS rate is 10%. This clause, however, only applies to persons who have given a deductor their permanent account number (PAN). A 20% TDS rate will be applied to those who still need to produce their PAN. Prior to making any dividend payments, regardless of the method, the tax deduction must be made.

Non-Applicability of TDS

If the shareholder is an individual, there is no tax to be withheld in the following situations:

• Any method other than cash is used to pay the dividend; and
• The total dividend amount, or aggregate dividend amount, that the corporation distributes, pays, or is projected to pay to that shareholder throughout the fiscal year does not exceed ₹5,000.
• If LIC, GIC, subsidiaries of GIC, or any other insurer owns the shares or has a full beneficial interest in such shares - a business trust established by a special purpose vehicle - or if any other person may be notified by the Central Government, the TDS provisions will not apply to such dividend credited or paid to any of these parties.

Exceptions to TDS Under Section 194

There are some situations in which you may not be required to pay TDS, as stated in section 194 of the Income Tax Act. These conditions are listed below:

• If section 115-O applies to your dividend income.
• If the dividend payment is sent to you in the form of checks and it is for less than ₹5,000.
• In form 15G/15H, you have self-declared that your income is below the basic exemption limit.
• If revenue is transferred to the business trust, section 194 will not be relevant. The Income Tax Act's section 2, clause (13A), has further information regarding these standards.

Form 15H

Forms 15H or 15G can be used by deductiblees whose income is below the taxable limit in order to prevent TDS deduction at source. If a person is sixty years of age or older and is claiming certain receipts without deducting taxes, they may file a declaration under sub-section (1C) of Section 197A of the ITA. Here are some points to keep in mind: 

• Form 15H can only be submitted by those who are 60 years of age or older.
• For the prior assessment year, there shouldn't have been any projected taxes. Because his income was below the taxable threshold, he did not have to pay any taxes for the prior year.
• If the interest from a single branch exceeds ₹10,000/- per year, you must submit form 15H to the banks.
• You should send this form to every debtor you have given a loan to. Let's say you have deposited ₹1,00,000 at each of the three SBI bank locations. Form 15H must be turned in by you to every branch. It needs to be turned in before you receive your initial notice of interest. It is not required, however, it will stop TDS from being deducted. The bank will deduct the TDS and issue the TDS certificate in the case of a delay.
• You have to file form 15H if you receive interest on loans, advances, debentures, bonds, or any other interest income that isn't from interest on bank accounts.

Form 15G

A person (as opposed to a business or firm) may declare certain receipts within the terms of sub-sections (1) and (1A) of Section 197A of the ITA without having to deduct tax. Here are some points to keep in mind:

•  Hindu Undivided Families and people under 60 years of age may file Form 15G.
• The same points that apply to Form 15G also apply to Form 15H; the only difference is that Form 15H is exclusively available to elderly persons.
• Interest on fixed deposits must be recorded on Form 15G before interest is paid.

Conclusion

If an individual's annual income surpasses their total income, they are liable to pay taxes, as per the Income Tax Act. Under the Act, there are several ways to satisfy your tax obligation, including tax on regular assessment, advance tax, tax collected at source (TCS), and TDS. When someone makes an income payment, they must deduct tax (at a certain rate) from that payment and only pay the net amount. This is known as tax deductibility.