Section 194 of the Indian Income Tax Act governs the TDS (Tax Deducted at Source) on payment of dividends.
Key highlights of this section are
For resident shareholders, the following TDS provisions apply to the payment of dividend
- TDS rate: The rate of TDS is 10% if the dividend amount exceeds ₹5,000 and 20% in the absence of PAN.
- PAN requirement: If the recipient of the dividend has furnished their PAN to the deductor, TDS would be deducted at the rate of 10%. In case the recipient fails to furnish PAN, the rate of TDS shall be 20%.
- Exemptions: TDS is not applicable if the recipient submits Form 15G/15H, which declares that their total income is below the taxable limit.
- Exemptions for specified entities: TDS is not applicable for specified insurance companies, mutual funds, and Alternative Investment Funds (AIF).
For non-resident shareholders (other than Foreign Portfolio Investors), the following TDS provisions apply to the payment of dividend
- TDS rate: The rate of TDS is 20% plus applicable surcharge and cess or the rates as per the Double Taxation Avoidance Agreement (DTAA), whichever is beneficial. The surcharge is restricted to a maximum of 15%.
- TRC requirement: A Tax Residency Certificate (TRC) must be obtained from the non-resident shareholder along with a declaration for Place of Effective Management (POEM), Permanent Establishment (PE), and beneficial ownership.
- DTAA provisions: If the non-resident shareholder is a resident of a country with which India has a DTAA, the provisions of the DTAA would apply, and the TDS rate would be as specified in the DTAA.
For Foreign Portfolio Investors (FPI)
The TDS rate on payment of dividends is 20% plus applicable surcharge and cess.
For compliance requirements
The following are the compliance requirements for TDS on the payment of dividends:
- Filing TDS Return: The deductor must file TDS returns within the due dates specified by the Income Tax Department. The TDS return must contain the details of all TDS deductions made during the relevant financial year.
- Issuing TDS Certificates: The deductor must issue TDS certificates in Form 16A to the recipient of the dividend within the specified due date.
- Form 15CA: In case of all payments made to non-residents, the deductor must file Form 15CA with the Income Tax Department.
- CA Certificate in Form 15CB: In case the payment made to a non-resident exceeds ₹5 Lakhs, a Chartered Accountant (CA) certificate in Form 15CB must be obtained and filed with the Income Tax Department.
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