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Section 194 of Income Tax Act - Payment of dividend

Introduction

Dividends are returns on investments in big companies, distributed as company profits to shareholders. Understanding the rules and taxes related to dividends is crucial. This guide will explain dividend payments, their types, and tax deductions in India.

Understanding Dividends

Dividends are a shareholder's share of the profits earned by a company. It is a way for companies to distribute their earnings to their investors. Dividends can be in the form of cash, additional shares, or other assets. Companies typically declare dividends periodically, such as quarterly or annually, depending on their financial performance.

There are several types of dividends, including:

  1. Cash Dividends: This is the most common type of dividend, where shareholders receive a cash payment based on the number of shares they own.
  2. Stock Dividends: Instead of cash, companies may choose to distribute additional shares to their shareholders as dividends. This increases the number of shares that the shareholder holds.
  3. Property Dividends: In some cases, companies may distribute physical assets or property as dividends to their shareholders.
  4. Scrip Dividends: Scrip dividends are similar to stock dividends, but instead of receiving additional shares, shareholders receive certificates that can be converted into shares at a later date.

Tax Deduction on Dividend Payments

In India, the Income Tax Act imposes a tax deduction at source (TDS) on dividend payments. Section 194 of the Income Tax Act specifies the conditions under which tax deduction is applicable. However, it is important to note that not all types of dividends are subject to tax deduction.

Section 2(22)(a) - Distribution of Assets Deemed as Dividend

Section 2(22)(a) of the Income Tax Act defines dividends as any distribution of accumulated profits by a company to its shareholders, including the release of company assets. This type of dividend is subject to tax deduction.

Section 2(22)(b) - Distribution of Debentures, etc. Deemed as Dividend

Section 2(22)(b) includes distributions of debentures, debenture-stock, or deposit certificates by a company to its shareholders. It also includes the distribution of shares as a bonus to preference shareholders. These types of dividends are subject to tax deduction.

Section 2(22)(c) - Distribution of Assets on Liquidation Deemed as Dividend

Section 2(22)(c) covers distributions made to shareholders on the liquidation of a company. If the distribution is attributable to the accumulated profits of the company before liquidation, it is deemed as a dividend and is subject to tax deduction.

Section 2(22)(d) - Distribution on Reduction of Share Capital Deemed as Dividend

Section 2(22)(d) includes distributions made by a company to its shareholders when there is a reduction in share capital. If the distribution is from the accumulated profits of the company, it is deemed as a dividend and is subject to tax deduction.

Section 2(22)(e) - Loans & Advances by Closely Held Company Deemed as Dividend

Section 2(22)(e) covers payments made by a closely held company to its shareholders by way of loans or advances. If the shareholder owns at least 10% of the voting power and has a substantial interest in a concern where the loan or advance is made, it is deemed as a dividend and is subject to tax deduction.

Tax Deduction Rates and Procedures

The tax deduction on dividend payments is set at a rate of 10% as per Section 194 of the Income Tax Act. The deduction is made at the time of payment, whether it is made in cash, through a check, draft, or any other mode of payment.

It is important to note that there are certain cases where no tax deduction is made under Section 194 for individual shareholders. These cases include:

  • When the shareholder is an individual.
  • When the dividend falls under Section 2(22)(a), (b), (c), or (d).
  • When the dividend is exempt in the hands of the shareholders.

 

Conclusion 

Grasping dividend payment regulations and tax implications is vital for both shareholders and companies. Dividends offer investors a worthwhile return option, yet understanding the tax deductions and rules outlined in the Income Tax Act is key. Knowledge of various dividend types and their tax rates can help shareholders make wise choices and increase their profits. 

Always seek advice from a professional tax advisor or financial expert to stay updated with recent tax laws and get personalized guidance for your particular situation.

 

author

The Tax Heaven

Mr.Vishwas Agarwal✍📊, a seasoned Chartered Accountant 📈💼 and the co-founder & CEO of THE TAX HEAVEN, brings 10 years of expertise in financial management and taxation. Specializing in ITR filing 📑🗃, GST returns 📈💼, and income tax advisory. He offers astute financial guidance and compliance solutions to individuals and businesses alike. Their passion for simplifying complex financial concepts into actionable insights empowers readers with valuable knowledge for informed decision-making. Through insightful blog content, he aims to demystify financial complexities, offering practical advice and tips to navigate the intricate world of finance and taxation.

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