Section 194 of the Income Tax Act: Dividend TDS, Rate, Threshold, and Compliance

In summary

Section 194 of the Income Tax Act, 1961 required domestic companies to deduct Tax Deducted at Source (TDS) from qualifying dividend payments to resident shareholders. The standard rate was 10% where the applicable conditions were met.

From 1 April 2026, the Income Tax Act, 2025 applies to relevant payments and credits. The corresponding dividend-TDS provision is Section 393(1), Table Sl. No. 7, which provides a 10% rate.

• Old provision: Section 194 of the Income Tax Act, 1961.
• Current provision: Section 393(1), Table Sl. No. 7 of the Income Tax Act, 2025.
• TDS rate: 10% for dividends covered by the provision.
• Deduction point: Before distribution or payment of dividend under the new Act.
• Purpose: Collects tax at source and creates a reporting trail.
• Tax credit: Eligible shareholders can claim TDS credit in their Income Tax return.

The transition date matters. Payments or credits made on or before 31 March 2026 remain governed by the 1961 Act, while those from 1 April 2026 follow the corresponding provisions of the 2025 Act.

Section 194 of the Income Tax Act, 1961 dealt with TDS on dividend income paid or distributed by a domestic company to a resident shareholder.

The company responsible for paying the dividend was required to deduct tax at source at the applicable rate before making the payment, subject to the conditions and exemptions prescribed under the law.

The provision helped collect tax when dividend income arose rather than requiring the entire tax liability to be settled later through the shareholder's Income Tax return.

For transactions governed by the 1961 Act, the TDS rate under Section 194 was 10%. The threshold applicable to resident individual shareholders was increased from Rs. 5,000 to Rs. 10,000 from 1 April 2025.

The Income Tax Act, 2025 replaced the Income Tax Act, 1961 for tax years beginning from 1 April 2026.

The new Act consolidates most TDS provisions into Sections 392 and 393. Section 393 covers TDS on payments other than salaries, including dividend income. For dividends, Section 393(1), Table Sl. No. 7 prescribes a 10% TDS rate where a domestic company pays or distributes a dividend.

Unlike the old presentation of Section 194, the new table itself shows no threshold for the dividend entry. Specific exemptions are provided separately under Section 393(4), including an exemption for a resident individual receiving qualifying non-cash dividends of up to Rs. 10,000 during the tax year.

For transactions governed by the Income Tax Act, 1961, the standard TDS rate under Section 194 was 10% for qualifying dividend payments. The current Income Tax Department TDS-rate guidance also lists 10% for dividend income under Section 194 for the 1961 Act framework.

For payments or credits governed by the Income Tax Act, 2025 from 1 April 2026, the corresponding Section 393 dividend provision also specifies a 10% rate.

The rate of TDS is not the same as the shareholder's final Income Tax liability. TDS is a tax collection mechanism, and the shareholder's final liability is determined when the total taxable income is calculated.

Under the Income Tax Act, 1961, TDS under Section 194 was deducted at the time of credit of the dividend to the shareholder's account or at the time of payment, whichever was earlier.

For the corresponding provision under Section 393 of the Income Tax Act, 2025, the dividend entry requires deduction before making any distribution or payment of the dividend.

This means companies need to complete the applicable TDS process before distributing the dividend to shareholders.

Dividend generally refers to a distribution of a company's profits to its shareholders. It can include dividends on equity shares and preference shares.

The Income Tax framework also contains rules dealing with certain deemed dividends. Therefore, determining whether a particular distribution constitutes dividend income requires consideration of the relevant statutory provisions rather than relying only on the label used by the company.

The timing of dividend income and its tax treatment should also be distinguished from the TDS obligation. You can read about Section 8 of Income Tax Act for the earlier provision dealing with the timing of specified dividend income under the 1961 Act.

The law provides specific situations where TDS does not have to be deducted.

Under the Income Tax Act, 2025, Section 393(4) includes exemptions for specified insurers, certain business trusts, notified persons, and a resident individual where the dividend is paid through a mode other than cash and the aggregate dividend during the tax year does not exceed Rs. 10,000.

Resident individuals may also submit an eligible declaration for nil deduction under the applicable provisions where the statutory conditions are satisfied.

The exemption is therefore conditional. A shareholder should not assume that every dividend below Rs. 10,000 automatically receives nil TDS under the new framework.

Providing a valid PAN is important because TDS may be deducted at a higher applicable rate where the required PAN information is unavailable or invalid.

The company or its registrar and transfer agent generally uses shareholder records to determine the appropriate withholding treatment. Shareholders should therefore keep their PAN and other relevant details updated with the company, depository participant, or registrar, as applicable.

A TDS deduction at source does not mean that the deducted amount is the final tax payable. The shareholder can generally claim eligible TDS credit while filing the Income Tax return.

A company paying dividends needs to establish the correct withholding treatment before making the payment.

Key responsibilities include:

• Identify shareholders: Determine the residential status and relevant shareholder category.
• Check PAN details: Use valid shareholder information for TDS processing.
• Determine applicability: Check the dividend amount, applicable rate, and exemptions.
• Deduct TDS: Apply the relevant rate before the payment or distribution.
• Deposit tax: Deposit the deducted amount within the prescribed timeline.
• File TDS statements: Report the deduction through the applicable TDS return.
• Issue certificates: Provide the applicable TDS certificate to shareholders.
• Maintain records: Retain documents supporting the deduction and exemption decisions.

For payments from 1 April 2026, companies should use the relevant Section 393 provision and table item rather than quoting old Section 194 for new transactions.

Failure to deduct or deposit TDS correctly can create additional tax and compliance obligations for the company.

Depending on the nature of the default, interest may apply for delayed deduction or deposit. Other consequences can include penalties, reporting issues, and additional compliance requirements.

Companies should therefore reconcile dividend records, shareholder information, TDS deductions, deposits, and filings. Proper documentation is particularly important where a shareholder claims an exemption or provides a declaration for nil deduction.

Section 194 dealt with TDS, not the complete taxation of dividend income.

TDS is deducted by the payer at the point of payment or distribution. The shareholder's final Income Tax liability is determined separately after considering total income, applicable tax provisions, deductions where available, and eligible TDS credit.

Therefore, a 10% TDS deduction does not necessarily mean that the shareholder's final tax rate on dividend income is 10%.

Investors should also distinguish dividend income from returns generated through Section 80C of Income Tax Act, which concerns deductions under the earlier Income Tax framework.

A shareholder should verify that the dividend received and TDS deducted are correctly reflected in the relevant tax records.

The shareholder should:

• Check the dividend amount: Compare the amount received with the company's dividend announcement.
• Verify TDS: Check the tax deducted against the available tax statement.
• Claim eligible credit: Include the dividend income and eligible TDS credit in the Income Tax return.
• Retain documents: Keep dividend statements and tax records for future reference.
• Check the applicable law: Determine whether the payment falls under the 1961 Act or the 2025 Act based on its timing.

If advance tax becomes relevant because dividend income increases your overall tax liability, you can also review 234B of Income Tax Act and Section 234A of Income Tax Act for the relevant interest provisions.

Section 194 of the Income Tax Act, 1961 governed TDS on qualifying dividend payments by domestic companies. From 1 April 2026, the corresponding dividend-TDS requirement is contained in Section 393(1), Table Sl. No. 7 of the Income Tax Act, 2025, with a 10% rate and separately specified exemptions.

Companies must apply the correct withholding rules, maintain records, deposit TDS on time, and report deductions accurately. Shareholders should verify their TDS records and claim eligible credit when filing their Income Tax returns.

Last reviewed: October 2026

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