Section 194 TDS on Dividend: Thresholds, Rates & FY 2025–26 Updates

The payer (the company or entity paying the dividend) must deduct TDS under Section 194 when it pays dividends to shareholders in India. This applies to Indian companies paying dividends and foreign companies that have arrangements to pay dividends within India; payments by a foreign company to shareholders outside India are not subject to Section 194. The provision covers dividends on equity and preference shares and also deemed dividends under section 2(22), while dividends paid in kind are excluded. TDS must be deducted even for interim dividends and when the recipient is a resident or non-resident whose Indian income is taxable.

For FY 2025–26, no TDS is required on dividend payments if the total TDS liability on such payments during the financial year does not exceed Rs. 10,000. This means payers need not worry about TDS compliance for dividends when their cumulative TDS on dividend payments in the year remains at or below Rs. 10,000. If cumulative TDS exceeds Rs. 10,000, the payer must deduct TDS as per the applicable rates and remit it to the government. The Rs. 10,000 limit is evaluated across the financial year, not per transaction.

The standard TDS rate on dividends under Section 194 for resident payees is 10%. This 10% rate applies to dividends paid on all kinds of shares by Indian companies and by foreign companies that pay dividends in India. Tax is to be deducted at the time of payment or credit, whichever is earlier, and deposited with the government. Recipients can claim the TDS as tax paid while filing their income tax returns, where dividends are taxed at the recipient's applicable slab rate.

If the payee does not furnish their PAN to the payer, TDS on dividends will be deducted at a higher, penal rate of 20%. This penal rate is mandatory and applies irrespective of the normal 10% rate, increasing the tax withheld at source. The payer should deduct TDS at 20% and report the same in TDS returns; the payee can later claim credit for the higher TDS while filing their income tax return, provided PAN is quoted subsequently. It is therefore important for recipients to provide PAN to avoid higher withholding.

A recipient can submit Form 15G (for individuals other than seniors) or Form 15H (for senior citizens) to the payer to claim nil deduction of TDS on dividends if they have no tax liability for the financial year considering all sources of income. These forms are eligible only when the recipient’s total estimated tax liability is nil, and they must be furnished before each payment where they seek non-deduction. If accepted by the payer, no TDS will be withheld on dividend payments, but incorrect submission may lead to penalties, so the recipient should ensure their total income indeed results in zero tax. The forms are not valid if the payer is legally required to deduct TDS (for example, where lower deduction certificates or other conditions are not met).

Certain institutional recipients are exempt from TDS on dividends under Section 194 as notified by the government, including Life Insurance Corporation of India, General Insurance Corporation of India, other insurers holding beneficial interest, and qualifying business trusts receiving dividends from their special purpose vehicles. The central government can notify additional institutions in the official gazette that will also be exempt. Payers should verify the recipient’s eligibility and maintain records of the exemption notification to support non-deduction. Exemptions are specific and must be confirmed against the latest government notifications and the recipient’s status.

Section 194 applies to dividends paid by companies (including preference and deemed dividends), while Section 194K applies to dividends and certain income distributions from mutual funds and securities transaction-related payments. In practice, dividends from mutual funds are subject to Section 194K, not Section 194, so mutual fund houses deduct TDS under 194K at its prescribed rates. For direct shareholding in companies, Section 194 governs TDS, and payers should identify the nature of the payer (company vs mutual fund) to determine the correct section. Misclassification can lead to incorrect TDS deduction and difficulties in claiming tax credits.

You can verify dividend TDS credits by checking Form 26AS and the Annual Information Statement (AIS) in your income tax account, where TDS deducted by the payer should appear against your PAN. Form 26AS consolidates TDS/TCS details reported by deductors and is updated periodically, while AIS provides additional transaction-level information; any TDS on dividends should be visible with the deductor’s TAN, amount, and date. If TDS is missing or incorrect, contact the payer to file corrected TDS returns or raise a grievance with the tax department; retain dividend payment proofs and communication for reconciliation. Regularly reviewing Form 26AS helps ensure you claim correct tax credit while filing your return.