Section 194 of Income Tax Act
Section 194 of Income Tax Act
The government introduced the system of TDS to reduce the time taken to collect tax and make the process simpler. TDS is deducted by the payer on behalf of the payee and deposited with the government.
It is required to be deducted by the payer when making payments such as rent, professional fees, salary, dividends, etc.
Dividend payments were previously exempt from TDS. However, the Finance Act 2020 made amendments to section 194 of the Income Tax Act, bringing dividends under the TDS umbrella. Read this article to learn in-depth about the various aspects of this section.
What is Section 194?
As per section 194 of the Income Tax Act the principal officer of an Indian company declaring and paying dividend to deduct tax at source from the amount of dividend before paying it to any resident. The company must deduct tax at source on equity shares.
Under section 194, TDS must be deducted at 10% if the receiving shareholder’s total dividend income for the year is more than ₹5000. The tax deduction is required at the time of making payment or credit, whichever is done earlier.
TDS @ 20% must be deducted on behalf of the shareholders who do not provide a PAN number.
Let us analyse all the aspects of section 194 with respect to the deductor, deductee, and payment.
About the Deductor & Deductee in Section 194
The TDS on equity shares is deducted by the company declaring and paying dividends to the shareholders.
The deductor (i.e., the company) must deposit the dividend with the government and file the TDS on the TDS Reconciliation Analysis and Correction Enabling System (TRACES).
The TDS must be deducted from the dividend income of the shareholders residing in India.
About the Payment Under Section 194
The TDS is required to be deducted by the company prior to making any cash payment.
It must be made before writing the dividend check or warrant, as the case may be.
The deduction must be made before paying any amount to the shareholders.
Exceptions to TDS Deduction Under 194 of Income Tax Act
According to section 194, TDS must be compulsorily deducted from the dividend income before paying it to the shareholders. However, there are certain exceptions to this rule, which are as follows:
No TDS is required to be deducted if the total dividend payment to an individual is less than ₹5000 and is paid by account payee check.
There is no requirement for TDS deduction in case section 115-O is applicable to the dividend.
No TDS is needed if the individual income is below the tax bracket and they submit form 15G or 15H.
Dividends on shares held by LIC, GIC, or any of its subsidiaries are exempt from TDS payment.
Section 194 A of the Income Tax Act
This section contains the rules regarding TDS on interest earned on investments other than securities. The incomes that are covered under 194 A section in TDS are as follows:
Earnings received on fixed deposits
Interest on recurring deposits
Interest on loans and advances
According to this section, TDS must be deducted by entities (other than individuals and HUF). The provisions of this section do not apply to interest paid to NRIs. The rate of TDS under section 194 is 10% when the receiver shares the PAN, and it is 20% when no PAN is provided.
Conclusion
Investing in securities is a widely recognised method of earning a side income in India. Therefore, every individual must be aware of the tax implications on earnings through various types of securities and investments.
Section 194 of the Income Tax Act lays down detailed rules for deducting tax at source for various payments made to individuals. While section 194A talks about interest on investments other than securities, section 194N of the Income Tax Act imposes TDS on cash withdrawals above ₹1 crore.
Understanding the various sections is crucial for managing taxes and promoting financial security. Another section which helps individuals in reducing their tax liabilities is Section 80D. This section allows a deduction for health insurance premiums, allowing individuals to save taxes when they buy medical insurance plans.
The Role of Health Insurance Policy
While tax knowledge allows you to understand and navigate through the tax requirements, health insurance is crucial to facing medical emergencies in life. Buying critical illness insurance assists you financially in case of critical health issues. On the other hand, it also allows you to gain benefits by reducing the tax burden as it provides deductions under the Income Tax Act.
Medical insurance can provide much-needed financial support in times of emergency without incurring expenses out of your pocket. Choosing Tata AIG as your insurance provider offers the benefit of cashless health insurance, allowing you access to top-class medical facilities in any hospital of your choice across the country.
Disclaimer / TnC
Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.
Related Articles
What is section 194 IA of the Income Tax Act?
What is section 194 IA of the Income Tax Act?
Section 194 IA lays down the TDS rules, under which the buyer must deduct TDS when purchasing an immovable property. He must deduct a TDS of 1% while paying the seller or owner of the property.
What is Form 15G and 15H?
Taxpayers can use forms 15G and 15H to avoid TDS. These forms allow individuals to prove that their income is below the threshold limit. Hence, no TDS is deductible.
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