TDS on Dividends: Section 194 / 393 Guide for FY 2026-27

TDS on Dividends: Section 194 / 393 Guide for FY 2026-27

If your company declares dividends, the Principal Officer is responsible for deducting TDS before distributing the amount to shareholders. Section 194 of the Income Tax Act 1961 (now consolidated into Section 393(1) of the Income Tax Act 2025) governs this obligation.

Dividend payments are common for closely held private companies, listed companies, and companies with retained earnings. Since DDT was abolished in 2020, the compliance burden has shifted from the company (which paid DDT) to a dual obligation: the company must deduct TDS, and the shareholder must include dividends in their taxable income.

Getting this wrong creates two problems. The company faces a 30% disallowance of the dividend as a business expense (though dividends are paid from post-tax profits, the disallowance affects deductibility of related expenses). The shareholder may receive a notice for unreported income if TDS is not reflected in Form 26AS.

This guide covers the rates, thresholds, definitions, exemptions, and filing requirements as they apply from FY 2026-27 onward.

Who Must Deduct TDS on Dividends

The following entities must deduct TDS before paying dividends:

• Any Indian company (private limited, public limited, one person company) paying dividends to its resident shareholders.
• Any foreign company that has made prescribed arrangements for the declaration and payment of dividends within India.

The Principal Officer of the company is the person responsible for ensuring TDS is deducted and deposited. In practice, this responsibility falls on the company secretary, CFO, or the director handling compliance.

Unlike Sections 194C, 194H, and 194J, there is no turnover-based exemption for the deductor. Every company paying dividends must deduct TDS, regardless of its size or turnover.

What Qualifies as "Dividend" for TDS Purposes

Dividend for TDS purposes includes:

What Is Excluded

1. Buyback of shares under Section 115QA. The company pays buyback tax. The amount received by the shareholder is exempt under Section 10(34A).
2. Dividend from a business trust (REIT/InvIT) distributed out of interest income. This is covered under a separate provision.
3. Dividend paid to non-residents. This falls under Section 195 (now Section 393(2) for non-resident payments), not Section 194. The rate for non-residents depends on the applicable DTAA.

TDS Rate

The 10% rate has been in effect since April 1, 2020 (when DDT was abolished and shareholder-level taxation began). This rate continues unchanged under the Income Tax Act 2025.

Threshold Limit: When TDS Is Not Required

TDS is not required if the total of all dividends paid by the company to one shareholder during the financial year does not exceed Rs 10,000.

This threshold was increased from Rs 5,000 to Rs 10,000 by the Finance Act 2025, effective April 1, 2025. For FY 2026-27, the Rs 10,000 limit applies.

The threshold applies per company per shareholder. If a shareholder receives Rs 8,000 from Company A and Rs 9,000 from Company B, neither company needs to deduct TDS because the per-company amount is below Rs 10,000.

Worked Example

A private limited company pays dividends to a shareholder during FY 2026-27:

Once the aggregate crosses Rs 10,000, TDS must be deducted on the payment that triggers the crossing and on all subsequent payments.

DDT Abolition: What Changed from April 1, 2020

Before April 1, 2020, the company paid Dividend Distribution Tax (DDT) at an effective rate of approximately 20.56% on dividends declared. Shareholders received dividends tax-free up to Rs 10 lakh (with a 10% tax on dividends exceeding Rs 10 lakh under Section 115BBDA for certain shareholders).

From April 1, 2020:

• DDT is abolished. The company no longer pays any tax on dividends declared.
• Dividends are fully taxable in the hands of the shareholder at their applicable income tax slab rate.
• The company must deduct TDS at 10% under Section 194 before distributing dividends.
• The shareholder must include the full dividend amount in their income tax return and pay any differential tax.

For shareholders in higher tax brackets (30% or above), the effective tax on dividends increased significantly after DDT abolition. The TDS at 10% is only an advance collection. The actual liability depends on the shareholder's total income and applicable slab rate.

Deemed Dividends: Section 2(22)(e) -- Loans and Advances

The most commonly triggered deemed dividend provision for closely held private companies is Section 2(22)(e). If a closely held company grants a loan or advance to:

• A shareholder who holds 10% or more of the voting power, or
• Any concern in which such shareholder has a substantial interest (20% or more share in income/profits)

The loan or advance is treated as a deemed dividend to the extent of the company's accumulated profits.

Key Points on Section 2(22)(e)

1. Only closely held companies are covered. A closely held company is one where the public is not substantially interested (more than 50% shares held by a few individuals/entities).
2. The deemed dividend is taxable in the hands of the shareholder (or the concern receiving the loan, as applicable).
3. TDS at 10% must be deducted on the deemed dividend amount at the time of credit or payment of the loan/advance.
4. Trade advances given in the ordinary course of business are excluded. If Company A is a supplier of goods to Director X, and Company A gives a trade credit to Director X for goods purchased, this is not a deemed dividend.
5. The deemed dividend is limited to the extent of accumulated profits of the company. If accumulated profits are Rs 5 lakh and a loan of Rs 8 lakh is given, only Rs 5 lakh is treated as deemed dividend.

Practical Risk for Private Companies

Many private company directors treat their companies as personal accounts, drawing amounts for personal use and recording them as "director's loan." Every such withdrawal triggers a Section 2(22)(e) deemed dividend to the extent of accumulated profits. The company must deduct TDS at 10% on each such withdrawal.

Failure to deduct TDS on deemed dividends is a common audit finding. The Assessing Officer will add the deemed dividend to the shareholder's income, charge interest under Section 201(1A), and impose a penalty under Section 271C.

Mutual Fund Dividends: Section 194K

Dividend income from mutual fund units is not covered under Section 194. It has a separate provision under Section 194K (now also within Section 393(1) of the Income Tax Act 2025).

The threshold was also increased from Rs 5,000 to Rs 10,000 by the Finance Act 2025.

If you receive dividends from equity mutual funds, debt mutual funds, or hybrid funds, the AMC deducts TDS at 10% before crediting the dividend to your bank account. The amount will appear in your Form 26AS / Annual Information Statement (AIS).

Form 121: Avoiding TDS When You Have Nil Tax Liability

If a shareholder's total income (including dividends) falls below the taxable threshold, they can submit Form 121 to the company to request nil TDS deduction. Form 121 replaced Form 15G and Form 15H from April 1, 2026, under Section 393(6) of the Income Tax Act 2025.

Eligibility for Form 121

• Resident individuals of any age (Form 121 replaces both 15G for under-60 and 15H for seniors).
• Hindu Undivided Families (HUFs).
• The estimated total income for the financial year must result in nil tax liability.
• NRIs, companies, and firms are not eligible to submit Form 121.

The company must verify the declaration, assign a Unique Identification Number (UIN), and retain the form. If a valid Form 121 is submitted before the dividend payment, the company must not deduct TDS.

For details on Form 121, see our Form 121 guide.

Timing of Deduction and Deposit

TDS must be deducted at the earlier of:

• The date of credit of the dividend to the shareholder's account, or
• The date of actual payment of the dividend.

For most companies, the trigger is the date on which the dividend is credited. Once the board declares a dividend and the record date passes, the dividend becomes payable. TDS must be deducted at that point, even if the actual bank transfer happens later.

After deduction, the TDS must be deposited with the government by:

Late deposit attracts interest at 1.5% per month (or part of a month) from the date of deduction to the date of actual deposit.

Section 393 Under the Income Tax Act 2025: What Changed

From April 1, 2026, the Income Tax Act 2025 is in force. Section 194 (along with all other 194-series sections) is now consolidated into the table-driven Section 393 framework.

For the full section mapping, see our Income Tax Act 2025 section mapping guide.

Consequences of Non-Deduction or Non-Deposit

Interest on Late Deduction/Deposit

Interest is per month or part of a month. A one-day delay into a new month counts as a full month.

Penalty Under Section 271C

The Assessing Officer can impose a penalty equal to the TDS amount that should have been deducted.

Deemed Assessee-in-Default Under Section 201

If TDS is not deducted or not deposited after deduction, the company is treated as an assessee-in-default. The company becomes liable for the TDS amount, interest, and penalty.

However, if the company can demonstrate that the shareholder has included the dividend in their return and paid tax on it, the company is not treated as an assessee-in-default for the TDS amount (though interest liability under Section 201(1A) continues).

Filing Requirements

Quarterly Due Dates for Form 140

After filing Form 140, the company must issue Form 16A (TDS certificate) to each shareholder within 15 days of the due date for filing the quarterly return.

Section 80M: Deduction for Intercorporate Dividends

If your company receives dividends from another domestic company and redistributes those dividends to its own shareholders, it may be eligible for a deduction under Section 80M to avoid cascading taxation.

Under Section 80M, a domestic company that receives dividends from another domestic company can claim a deduction for the amount of dividend distributed to its own shareholders, up to one month before the due date for filing its income tax return.

How It Works

1. Company A pays Rs 10 lakh dividend to Company B.
2. Company B distributes Rs 8 lakh as dividend to its shareholders within the prescribed timeline.
3. Company B can claim a deduction of Rs 8 lakh under Section 80M. Only Rs 2 lakh (Rs 10 lakh minus Rs 8 lakh) is added to Company B's taxable income.

This prevents double taxation when dividends pass through holding company structures. However, Company B must still deduct TDS at 10% when paying dividends to its shareholders.

Common Mistakes to Avoid

1. Not deducting TDS on deemed dividends. Director loans from closely held companies are the most common missed deemed dividend. Every loan or advance to a 10%+ shareholder (or their concern) triggers Section 2(22)(e), and TDS must be deducted.

2. Applying the wrong threshold. The threshold increased from Rs 5,000 to Rs 10,000 effective April 1, 2025. If your accounting software still uses the old Rs 5,000 limit, you may be over-deducting TDS and creating unnecessary cash flow issues for shareholders.

3. Not tracking aggregate per shareholder. The Rs 10,000 threshold is on the aggregate of all dividends paid to one shareholder in the financial year. Interim dividends, final dividends, and special dividends must be aggregated per shareholder.

4. Confusing Section 194 with Section 194K. Section 194 covers dividends from company shares. Section 194K covers income (including dividends) from mutual fund units. The rates and thresholds are the same (10%, Rs 10,000), but the deductor is different (company vs. AMC). Report them under the correct code.

5. Not accepting Form 121 from eligible shareholders. If an eligible shareholder submits a valid Form 121 declaring nil tax liability, the company must not deduct TDS. Rejecting a valid declaration or deducting TDS despite it creates refund issues for the shareholder.

6. Forgetting TDS on dividend paid to partnership firms or LLPs. If a partnership firm or LLP holds shares in your company, TDS at 10% applies on dividends exceeding Rs 10,000. The firm is a "resident" entity. The threshold applies per entity, not per partner.

7. Using old section codes after April 1, 2026. Under Section 393 of the Income Tax Act 2025, the new payment code system replaces old "194" references. Using the old code in Q1 FY 2026-27 Form 140 will trigger rejection.

Practical Checklist for Companies Declaring Dividends

• Before declaring a dividend, confirm accumulated profits are sufficient. Dividends cannot exceed distributable profits.
• Obtain PAN from every shareholder. Without PAN, deduct at 20%.
• Check if any shareholder has submitted Form 121 (nil TDS declaration). If valid, do not deduct TDS on their dividend.
• Check if any shareholder holds a lower deduction certificate under Section 197. Apply the rate specified in the certificate.
• Maintain a shareholder-wise register tracking all dividends paid during the year. Monitor the Rs 10,000 aggregate threshold per shareholder.
• Deduct TDS at 10% on dividend payments that push the aggregate past Rs 10,000 for any shareholder. Continue deducting on all subsequent payments.
• Deposit TDS by the 7th of the following month. Set a recurring calendar reminder.
• File Form 140 quarterly and issue Form 16A within 15 days of the filing due date.
• For deemed dividends (loans/advances to 10%+ shareholders), deduct TDS at the time of credit or payment of the loan.
• Update your TDS software to use the Section 393(1) payment code framework for FY 2026-27.

Tax Garden Handles Your TDS Compliance

Tax Garden's TDS compliance plans track every dividend payment, apply the correct TDS rate and threshold, deposit TDS before the monthly deadline, and file Form 140 on time every quarter. No missed deductions, no interest, no penalty notices.

For related topics, see our guides on TDS rate chart for FY 2026-27, TDS on interest (Section 194A), TDS on commission and brokerage (Section 194H), Form 121 TDS exemption declarations, new TDS payment codes under the Income Tax Act 2025, and the Income Tax Act 2025 section mapping guide.

Frequently Asked Questions

Is TDS under Section 194 applicable on dividends paid to non-residents?

No. Section 194 applies only to dividends paid to residents. Dividends paid to non-resident shareholders are covered under Section 195 (now Section 393(2) under the new Act), with rates determined by the applicable Double Taxation Avoidance Agreement (DTAA) or the rates specified in the Act, whichever is lower. The standard rate for non-residents without DTAA benefit is 20%.

Does TDS apply on dividend paid by a foreign company to an Indian resident?

Section 194 applies to dividends paid by an Indian company. A foreign company that has made prescribed arrangements for declaring and paying dividends within India is also covered. However, dividends received from a foreign company that are credited directly abroad are not subject to Section 194 TDS. The Indian resident must report this income in their ITR and claim foreign tax credit if applicable.

Can a company apply for a lower TDS rate on dividends?

It is the shareholder (payee), not the company, who applies for a lower or nil TDS certificate under Section 197. The shareholder submits an application to their Assessing Officer, and if issued, the shareholder furnishes the certificate to the company. The company then deducts TDS at the rate specified in the certificate.

Is TDS applicable on bonus shares issued by the company?

No. Issue of bonus shares out of capitalised profits is not treated as a dividend for TDS purposes. However, if bonus shares are issued out of accumulated profits to preference shareholders, it may be treated as a deemed dividend under Section 2(22)(b).

Does TDS apply on the GST component if any charges are associated with dividend payments?

Dividends themselves are not subject to GST. However, if any ancillary charges (such as processing fees) are invoiced alongside the dividend, TDS applies on the non-GST component if the GST is separately indicated in the invoice.

What if the shareholder's total income is below the taxable limit?

The shareholder can submit Form 121 (which replaced Form 15G and 15H from April 1, 2026) to the company, declaring that their estimated total income results in nil tax liability. If the company receives a valid Form 121 before paying the dividend, it must not deduct TDS.

How are dividends taxed in the hands of individual shareholders?

Dividends received by individual shareholders are added to their total income and taxed at the applicable slab rate. Under the new tax regime for FY 2026-27, this could be 0% (up to Rs 4 lakh), 5% (Rs 4-8 lakh), 10% (Rs 8-12 lakh), 15% (Rs 12-16 lakh), 20% (Rs 16-20 lakh), 25% (Rs 20-24 lakh), or 30% (above Rs 24 lakh). The TDS of 10% is adjusted against the final tax liability. No deduction under Section 80C or other investment-linked sections is available against dividend income under the new regime.

Sources

This guide is verified against Section 194 of the Income Tax Act, 1961 (TDS on payment of dividends), Section 393(1) of the Income Tax Act, 2025 (consolidated non-salary TDS table, effective April 1, 2026), Section 2(22) of the Income Tax Act (definition of deemed dividend), Finance Act 2020 (abolition of DDT, introduction of shareholder-level dividend taxation from April 1, 2020), Finance Act 2025 (threshold increase from Rs 5,000 to Rs 10,000 effective April 1, 2025), Section 194K (TDS on mutual fund income), Section 80M (deduction for intercorporate dividends), Section 393(6) (Form 121 replacing Form 15G/15H), Section 206AA (TDS at 20% for no PAN), Section 201(1A) (interest on late deduction/deposit), and Section 271C (penalty for failure to deduct). Rates, thresholds, and definitions confirmed from ClearTax, Tax2win, BajajFinserv, BankBazaar, Quicko, Motilal Oswal, and IndiaFilings reference materials as of May 2026. All rates and thresholds should be verified against incometax.gov.in before applying to specific deductions.