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2021

Applicability of TDS on Payment of Dividend (Section 194)

TDS

Dividend refers to a reward, cash or otherwise, that a company gives to its shareholders. Dividends can be issued in various forms, such as cash payment, stocks or any other form. Essentially, a dividend is the distribution of some of a company's earnings to a class of its shareholders, as determined by the company's board of directors. It requires the shareholders’ approval to pay dividend. However, it is not obligatory for a company to pay dividend.

In a nutshell, the dividend is simply an equity (and preference) shareholders profit share in the company and section 194 calls for the deduction of tax on such dividend income given to shareholders.

Definition of Dividend:

Section 2(22) deals with the definition of dividends as per the Income Tax Act, 1961.

  • Distribution of Assets Deemed as Dividend [Section 2(22)(a)]:
  • Dividend includes any distribution by a company of accumulated profits, whether capitalized or not if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company.
  • Distribution of Debentures etc. Deemed as Dividend [Section 2(22)(b)]:

Dividend includes

  • Any distribution to its shareholders by a company of debentures, debenture-stock or deposit certificates in any form, whether with or without interest and
  • Any distribution to its preference shareholders of shares by way of bonus
  • Distribution of Assets on Liquidation Deemed as Dividend [Section 2(22)(c)]:
    • Dividend includes any distribution made to the shareholders of a company on its liquidation, to the extent to which such distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not.

Distribution on Reduction of Share Capital Deemed as Dividend [Section 2(22)(d)]:

  • Dividend includes any distribution to its shareholders by a company on the reduction of its capital to the extent to which the company possesses accumulated profits, whether capitalized or not.

Loans & Advances by Closely held Company Deemed as Dividend [Section 2(22)(e)]:

  • Dividend Includes any payment by a company not being a company in which public are substantially interested of any sum by way of loan or advance to be

Deemed as Dividend in the hands of

Conditions

In the hands of Shareholder

  • If Loans & Advances are given to a shareholder.

  • He is the beneficial owner of shares.

  • He holds not less than 10% of the voting power.

In the hands of Shareholder

  • If Loans & Advances are given to any person on behalf of or for the individual benefit of such a shareholder.

In the hands of a Concern/Entity/Firm

  • If Loans & Advances are given to any business entity in which a shareholder is a member or a partner and has substantial interest in such entity/firm.

 

Liability to Deduct TDS on Dividend u/s 194:

  • A principal officer of a company, which is in the process of declaring dividends (equity or preference or both) in India, is required to deduct tax on dividend covered in the sub-clause (a) or (b) or (c) or (d) or (e) of clause 22 of section 2.
  • But from 1st April 2003, this provision of TDS will only be applicable on dividend as per section 2(22)(e) as dividends covered u/s 2(22)(a) or (b) or (c) or (d) are exempt in the hands of the shareholders.

Rate of TDS Deduction:

  • The rate under this section is 10%. TDS will be deducted at, time of payment (via cash, cheque, draft etc.) or credit, whichever is earlier.

Threshold Limit for TDS Deduction under this Section:

  • There shall be no TDS deduction u/s 194 where payment of dividend is up to Rs. 5000, if dividend is paid by any mode, other than cash.

Exceptions from TDS deduction under section 194:

No tax deduction will be made u/s 194 in case of shareholder (who is an individual), when:

  • The dividend is paid by way of account payee cheque & such amount (alone or aggregate during financial year) does not exceed Rs. 5000.
  • Dividend is covered under section 115-O.
  • The dividend is paid to LIC, GIC or its subsidiaries or to any other insurer in respect of the shares that are owned by them or in which they have a full beneficial interest.
  • If you have submitted Form I5G/15H as your income is below taxable limit.

Time Limit to deposit TDS:

  • TDS deducted is required to be deposited to the credit of the Government within given below timeline to avoid interest:

Month of Deduction

Due date of deposit of TDS

During any month from April to February

7th of Subsequent Month

During the month of March

30th April

TDS Return Filing Due Date:

Quarter

TDS Return Filing Due Date

Q1: April to June

31st July

Q2: July to September

31st October

Q3: October to December

31st January

Q4: January to March

31st May

Form 16A (TDS Certificate) Issuance Due Date:

Quarter

TDS Return Filing Due Date

Q1: April to June

15th  August

Q2: July to September

15th  November

Q3: October to December

15th February

Q4: January to March

15th June

Interest on Late Filing:

Section

Nature of Default

Interest Payable

Period for which interest is to be paid

201A

Non deduction of tax at source, either in whole or in part

1% per month or part thereof

From the date on which tax deductible to the date on which tax is actually deducted.

After deduction of tax, Non-payment of tax either in whole or in part

1.5% per month or part thereof

From the date of deduction to the date of payment.

Notes:

  • The above interest should be paid before filing of TDS return. The deductor can make the payment of interest on such late payment of TDS before filing TDS returns or demand raised by TRACES.
  • The interest paid u/s 201A is not allowed as an expense under the Income Tax provisions.
  • Interest to be calculated on a monthly basis and not on the number of days i.e. part of a month is considered as a full month.

Penalty for late filing of TDS Returns:

  • Section 234E:
  • The deductor will be liable to pay by way of fees Rs.200 per day till the failure to pay TDS continues.
  • However, the penalty should not exceed the amount of TDS for which the statement was required to be filed.

Section 271H:

  • Also, a penalty from Rs.10,000 to Rs.1 lakh is leviable under Section 271H if a company provides incorrect information or fails to submit the returns within the specified due date.
  • This penalty will be charged in addition to the penalty under Section 234E.
  • No penalty under Section 271H will be charged in case of delay in filing the TDS/TCS return if the following conditions are satisfied:
    1. The tax deducted/collected at source is paid to the credit of the government.
    2. Late filing fees and interest (if any) is paid to the credit of the government.
    3. The TDS/TCS return is filed before the expiry of a period of one year from the due date specified in this behalf.

 

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