Section 194 TDS on Dividends: Rate, Threshold, Exemptions & Compliance Guide (FY 2025-26)

Section 194 of the Income-tax Act, 1961 requires a company to deduct tax at source whenever it pays a dividend to a resident shareholder. For FY 2025-26, the rate is 10 percent and, following the changes made in Budget 2025, the exemption threshold has been raised from ₹5,000 to ₹10,000 of dividend paid to a shareholder in the financial year.

That sounds simple, but in practice companies, registrars and shareholders run into questions about who must deduct, when the threshold applies, how declarations in Form 15G and Form 15H work, what happens with non-resident shareholders, and how mutual fund dividends differ. Errors lead to interest, late fees and penalties for the company and to mismatches in the shareholder's tax credit. Since dividends have been taxed in the hands of shareholders since FY 2020-21, the compliance burden sits firmly with the payer. This guide from Casela Advisors, a Chartered Accountant firm in Andheri East, Mumbai, explains Section 194 TDS on dividends for FY 2025-26, including rates, thresholds, exemptions, compliance steps, due dates and consequences, and shows how shareholders can claim credit and avoid surprises at filing time. If you need hands-on support, see our TDS return filing service.

01What Is Section 194 and How Does TDS on Dividends Work?

Section 194 is the provision under which a domestic company must deduct tax at source when it pays a dividend to a resident shareholder. The company deposits the tax with the government and gives the shareholder a certificate, and the shareholder claims credit for it in the income tax return.

The obligation falls on the company distributing the dividend, or on its registrar or paying agent acting on its behalf, and it applies to dividends on equity and preference shares. A shareholder, whether an individual, HUF, firm or company, receives the dividend net of tax. The deduction is made at the time of payment, and the company reports it in quarterly TDS returns.

Because the dividend is taxable in the shareholder's hands at their normal slab rate, the TDS is an advance payment, not the final tax. Where the shareholder's total tax is lower than the TDS, a refund arises on filing; where it is higher, the balance is paid as self-assessment tax. Companies should also remember that deemed dividend provisions, including certain loans to shareholders, are governed by their own rules and should be reviewed separately. For broader guidance, see our note on TDS and tax liability in India.

02What Are the Rate and Threshold Under Section 194 for FY 2025-26?

For FY 2025-26, the rate of TDS on dividends to residents under Section 194 is 10 percent, and no tax needs to be deducted if the dividend paid to a shareholder during the financial year does not exceed ₹10,000, provided it is paid by account payee cheque or an electronic mode.

The threshold was ₹5,000 until FY 2024-25 and was doubled with effect from 1 April 2025. A shareholder who receives, say, ₹9,500 in a year from one company suffers no TDS, while a shareholder who receives ₹10,500 suffers TDS on the whole amount, not only on the excess. The threshold is tested company by company and year by year, and it covers the aggregate of interim and final dividends paid in the year.

If the shareholder has not furnished a PAN, the higher rate of 20 percent under section 206AA applies. The special higher rates for non-filers of returns under sections 206AB and 206CCA were withdrawn from 1 April 2025, so the company is no longer required to check specified-person status for FY 2025-26 payments.

Several related rates need attention, as the table below shows.

For non-resident shareholders, tax is deducted under section 195, generally at 20 percent plus surcharge and cess, or at a lower treaty rate if the shareholder provides a tax residency certificate and Form 10F, and the deduction is reported in Form 27Q. Remittances abroad can also bring in other FEMA formalities, which we cover in our guide to FEMA compliance in India. Dividend income from mutual fund units is covered by a separate section 194K, with the same 10 percent rate and the same ₹10,000 threshold. Buy-back consideration has been treated as deemed dividend in the hands of shareholders for buy-backs from 1 October 2024 and is reported to attract TDS under section 194 for resident shareholders in FY 2025-26, although the treatment is expected to change under the Income-tax Act, 2025 from FY 2026-27, so confirm the position before paying.

03Who Is Exempt From TDS on Dividends and When Can Tax Be Reduced?

No TDS applies when the dividend is within the ₹10,000 threshold, when the shareholder is one of the specified insurers, or when a valid declaration or certificate allows nil or reduced deduction. Exemption from TDS does not exempt the dividend from tax, which remains taxable in the shareholder's hands.

Section 194 exempts dividends paid to the Life Insurance Corporation of India, the General Insurance Corporation of India and its subsidiaries, and other insurers in respect of shares owned by them or in which they have full beneficial interest. A resident individual or HUF whose estimated total income is below the taxable limit can submit Form 15G, and a senior citizen aged 60 or more can submit Form 15H, to the company or registrar so that no tax is deducted, provided the conditions of section 197A are met and a PAN is quoted.

A shareholder whose actual tax liability is lower than 10 percent, for example because of losses or deductions, can apply to the assessing officer for a lower deduction certificate under section 197, and the company must then deduct tax as stated in it. Non-residents can claim treaty benefits through the documents mentioned earlier. Our lower tax deduction certificate page explains how to apply.

04How Do You Comply With Section 194 Step by Step?

Compliance with Section 194 follows a clear sequence: confirm the shareholder's status, apply the right rate and threshold, deduct at payment, deposit on time, file the quarterly return and issue the certificate. The eight steps below show how a company or its finance team should run the process.

• 1Obtain a TAN and keep shareholder data current. The company needs a Tax Deduction Account Number, and must hold each shareholder's PAN, residential status, category and bank details. Missing PANs and wrong residential status are the commonest causes of wrong deduction.
• 2Classify each shareholder. Divide shareholders into residents, non-residents, insurers, mutual funds and other categories, since the section, rate and return form differ for each. Identify those who have furnished Form 15G, Form 15H or a lower deduction certificate.
• 3Apply the threshold carefully. Total the dividend payable to each shareholder for the financial year across interim and final dividends. If the total is ₹10,000 or less and is paid by account payee cheque or electronic mode, no deduction is required, otherwise deduct on the full amount.
• 4Deduct tax at the correct rate. Deduct 10 percent for resident shareholders with a PAN, 20 percent where PAN is missing, and the applicable section 195 or treaty rate for non-residents. Keep the supporting documents on file for audit.
• 5Deposit the tax by the due date. Deposit TDS with the government by the 7th of the month following the month of deduction, using the prescribed challan. For tax deducted in March, the due date is 30 April. Late deposit attracts interest.
• 6File the quarterly TDS return. Report resident dividends in Form 26Q and non-resident dividends in Form 27Q by the quarterly due dates of 31 July, 31 October, 31 January and 31 May. Reconcile each deduction with the challan details. See our guide to Form 26Q.
• 7Issue Form 16A to shareholders. After filing the return, download and issue Form 16A to each shareholder within 15 days of the due date for filing the return. This certificate lets the shareholder claim credit, and it should match their Form 26AS.
• 8Reconcile and correct errors. Compare your deductions with the TRACES portal and shareholder queries, and file a correction statement if needed. Prompt correction avoids notices and credit mismatches.

05How Are Dividends Taxed for Shareholders and How Do They Claim TDS Credit?

Dividends are added to the shareholder's income under the head income from other sources and taxed at the shareholder's slab rate, and TDS deducted under Section 194 is claimed as credit when the return is filed.

Since the abolition of dividend distribution tax from FY 2020-21, all dividends are taxable in the hands of the recipient. A shareholder can claim a deduction for interest expense incurred to earn the dividend, but only up to 20 percent of the dividend income, and no other expenses are allowed. The dividend is reported in the schedule for other sources in the return, and the TDS is picked up from Form 26AS and the Annual Information Statement.

Shareholders should check that every dividend and TDS entry appears there before filing, because a mismatch can delay a refund. A resident shareholder with income below the taxable limit who had TDS deducted despite being eligible for Form 15G can claim a refund by filing a return. Investors with several demat accounts and many holdings can find it hard to reconcile, so see our notes on capital gains on securities and our tax health check. NRIs earning Indian dividends should also read about NRI tax filing and DTAA.

06What Are the Penalties for Not Complying With Section 194?

A company that fails to deduct, deposit or report TDS on dividends faces interest, a daily fee for late returns, possible penalty for incorrect returns, and in serious cases prosecution. The cost can exceed the tax itself.

Where a company fails to deduct tax and the shareholder has paid it, the company may be treated as not in default only if conditions are met, but the shareholder's credit and the company's reporting still need to be corrected. Outsourcing shareholder data and TDS work to a specialist reduces such risks. See our financial reporting and MIS and accounting and tax compliance support.

07How Has Dividend Taxation in India Changed Over the Years?

Dividend taxation in India has swung between taxing the shareholder and taxing the company, and the present system, which taxes the shareholder with TDS under Section 194, is the product of those shifts.

Historically, dividends were taxed in the hands of shareholders. In 1997, dividend distribution tax was introduced, making the company pay tax on dividends it declared and exempting the dividend in the shareholders' hands. It was removed in 2002 so that dividends became taxable in the hands of shareholders again, and it was reintroduced in 2003, remaining in force until 2020 with several changes in rate and coverage along the way.

The Finance Act, 2020 abolished dividend distribution tax from 1 April 2020 and restored taxation in the hands of the recipient. Section 194 therefore became a central compliance requirement. A temporary reduced rate of 7.5 percent applied from 14 May 2020 to 31 March 2021 as COVID relief, and the standard rate of 10 percent has applied since. Budget 2025 then doubled the threshold to ₹10,000 and withdrew the higher rates for non-filers. The Income-tax Act, 2025 applies from 1 April 2026, but dividends paid in FY 2025-26 remain under the 1961 Act. Current rules and forms are published on the official Income Tax Department e-filing portal.

Related reading from Casela Advisors

08What Do Companies and Shareholders Ask Most About Section 194?