TDS on Payment of Dividends [Section 194]

Dividends attract dividend distribution tax @ 15% in the hands of the company. There is no liability to pay tax on individuals receiving it from a domestic company. It is, therefore, there is no provision for TDS on payment of Dividend. Domestic Companies do not need to deduct TDS on making payments of dividends to their Shareholder. However, there are circumstances when TDS has to be deducted. The TDS Provisions under this section are attracted only in respect of deemed dividend referred to in section 2(22)(e) if such dividend exceeds ₹ 2,500 in a year. The rate of tax deduction under this section is 10%.

Section 2(22)(e)

This section provides a definition of the deemed dividend for the purpose of TDS on Dividend related section 194.

TDS on deemed Dividend

Section 2(22)(e) states –

Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31^st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten percent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company, on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company, in either case, possesses accumulated profits;

This section states that the payment to the substantially interested shareholder is regarded as deemed dividend that may have been paid as an advance or loan or any other form not being termed as a dividend, will be called as deemed dividend. It is applicable on accompanies that are not companies in which public are substantially interested. This section also provides conditions to which even though any sum paid will not be termed as deemed dividend and such conditions include situations like payment on liquidation, merger and other few such mentioned payments.

Payments on which TDS under this section is deducted

• When deemed dividend as referred above is paid, is such dividend exceeds ₹ 2,500 in a year.
• Such payment is paid by an account payee cheque.

The TDS provisions will not apply to dividend receivable by LIC, GIC, its subsidiaries or any other insurer provided the shares are owned by them, or they have a full beneficial interest in such shares.

Returns of TDS

Details for such deduction is filed in Form 26Q. It contains details of –

• Payment made and TDS deducted,
• PAN details, if not furnished deduction @ 20%

Calculation of Amount

Although TDS is deducted on such deemed dividend only when it exceeds ₹ 2,500, when it exceeds such amount, TDS is deducted at a flat rate of 10% on the whole amount.