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

Section 194 deals with TDS deduction on dividend income. TDS is deducted at 10% for all dividend payments exceeding Rs. 10,000 during the financial year.

TDS under Section 194 - Applicability

• Section 194 provides tax rates for dividends. Dividends are taxed at the applicable slab rates of the individual. 
• Both Indian companies and foreign companies are included in this section. Any Indian company paying dividends to its shareholders, or a foreign company that has made arrangements to pay dividends within India, should deduct dividends. 
• The rationale behind this is quite simple. Dividends from an Indian company are income earned from an Indian company, an Indian income. 
• Since Indian income is taxable for both residents and non-residents, TDS provisions are attracted for Indian companies, whether paid to residents or non-residents. 
• Whereas, when a foreign company pays dividends to shareholders in resident in India, whose worldwide income is taxable, TDS provisions are also attracted for the same.
• When a foreign company pays a dividend to a non-resident, outside India, TDS provisions are naturally not attracted, as there are no tax implications. 
• Dividends on preference shares are also covered under this section. 
• Deemed dividends under section 2(22) also attract TDS provisions under section 194.
• Dividends paid in kind are not subject to TDS under Section 194. 
• Even interim dividends are covered under Section 194 TDS deduction.

New TDS Threshold for FY 2025-26

With effect from 1st April 2025, dividend TDS need not be deducted if the amount of dividend paid to an assessee during a financial year does not exceed Rs. 10,000. Previously, this threshold limit was Rs. 5,000 per financial year.

TDS Rates under Section 194 for 2026

Standard Rates for Residents

• For dividends for all kinds of shares, paid by an Indian company or a foreign company, TDS is deducted at 10%. 

Penalty Rates for Non-Compliance

• Where the payee does not furnish their PAN to the payer, TDS will be deducted at a penal rate of 20%.

Nil TDS Deduction - Form 15G and 15H Requirements

• Strategies for eliminating TDS requirements are not needed when the TDS paid during the financial year does not exceed Rs. 10,000. 
• In other cases, the assessee can submit Form 15G and 15H for the deduction of TDS at nil rates. 
• This can be made when the taxpayers do not have any tax liability for the financial year, considering all their possible income sources, including dividends.

Institutional Exemptions

For certain insurance companies, the section 194 TDS provisions do not apply:

• For dividend payments made to Life Insurance Corporation of India, holding beneficial interest
• For dividend payments made to General Insurance Corporation of India, holding beneficial interest
• For dividend payments made to any other insurers, holding beneficial interest
• For business trusts falling under the definition as per the Income Tax Act, receiving dividends from its Special Purpose Vehicle
• Any other institutions,  as the central government notifies in the official gazette.

Section 194 vs. Section 194K: Which applies to you?

Section 194 applies only when you receive dividends from equity or preference shares invested directly in the companies. However, when you receive dividends from mutual funds, TDS provisions under section 194K are attracted, and section 194 does not apply in such cases.

Verifying Tax Credit in Form 26AS & AIS

Detailed information on all the particulars related to TDS deducted can be found in Form 26AS. Verifying the TDS deduction details in Form 26AS helps the taxpayers to ensure the accuracy of refund claims.