How TDS on Dividends Works Under Section 194 for FY 2026-27

TDS on Dividends: Section 194 / 393 Guide for FY 2026-27

If your company declares dividends, the Principal Officer is responsible for deducting TDS before distributing the amount to shareholders. Section 194 of the Income Tax Act 1961 (now consolidated into Section 393(1) of the Income Tax Act 2025) governs this obligation.

Dividend payments are common for closely held private companies, listed companies, and companies with retained earnings. Since DDT was abolished in 2020, the compliance burden has shifted from the company (which paid DDT) to a dual obligation: the company must deduct TDS, and the shareholder must include dividends in their taxable income.

Getting this wrong creates two problems. The company becomes an assessee in default, liable for the tax not deducted, interest and a possible penalty equal to the TDS. The shareholder loses the credit in Form 26AS and may face a mismatch when the dividend shows up in AIS.

This guide covers the rates, thresholds, definitions, exemptions, and filing requirements as they apply from FY 2026-27 onward.

Who Must Deduct TDS on Dividends

The following entities must deduct TDS before paying dividends:

• Any Indian company (private limited, public limited, one person company) paying dividends to its resident shareholders.
• Any foreign company that has made prescribed arrangements for the declaration and payment of dividends within India.

The Principal Officer of the company is the person responsible for ensuring TDS is deducted and deposited. In practice, this responsibility falls on the company secretary, CFO, or the director handling compliance.

Unlike Sections 194C, 194H, and 194J, there is no turnover-based exemption for the deductor. Every company paying dividends must deduct TDS, regardless of its size or turnover.

What Qualifies as "Dividend" for TDS Purposes

Dividend for TDS purposes includes:

• Interim and final dividends declared by the company, including dividends on preference shares
• Deemed dividends under Section 2(22)(a) to (e) of the 1961 Act (Section 2(40) of the 2025 Act), such as distributions on liquidation or capital reduction out of accumulated profits and loans or advances covered by Section 2(22)(e)

What Is Excluded

1. Buyback of shares. Up to 30 September 2024 the company paid buyback tax under Section 115QA and the shareholder was exempt under Section 10(34A). From 1 October 2024 to 31 March 2026 buyback proceeds were a deemed dividend. From 1 April 2026 (Finance Act 2026) buyback consideration is taxed as capital gains, so it is outside dividend TDS again.
2. Distributions by a business trust (REIT/InvIT) to unitholders. These are covered under Section 194LBA (Section 393(1), Table Sl. No. 4(ii) of the 2025 Act), not Section 194.
3. Dividend paid to non-residents. This falls under Section 195 (now Section 393(2) for non-resident payments), not Section 194. The rate for non-residents depends on the applicable DTAA.

TDS Rate

Tax Rate Chart

TDS Rates on Dividends : Section 393(1) / Section 194

Rates applicable for FY 2026-27 (effective April 1, 2026 under Income Tax Act 2025)

Resident shareholder with valid PAN

Standard rate since April 1, 2020 : unchanged under IT Act 2025

10%

No PAN furnished by shareholder

Section 206AA applies; shareholder must submit PAN to avoid higher deduction

20%

Lower deduction certificate (Section 197, now Section 395)

Shareholder applies to their Assessing Officer; rate specified in certificate governs

As per certificate

Form 121 submitted (nil tax liability)

Replaced Form 15G/15H from April 1, 2026 under Section 393(6)

Nil

Source: Section 393(1), Income Tax Act 2025; Section 206AA; Section 393(6) : Finance Act 2025

The 10% rate has been in effect since April 1, 2020 (when DDT was abolished and shareholder-level taxation began). This rate continues unchanged under the Income Tax Act 2025.

Threshold Limit: When TDS Is Not Required

TDS is not required if the shareholder is an individual, the dividend is paid by a mode other than cash, and the total of all dividends paid or likely to be paid by the company to that shareholder during the financial year does not exceed Rs 10,000. Under the 2025 Act this relief sits in Section 393(4), Table Sl. No. 10. It does not apply to HUFs, firms, LLPs, trusts or companies, which suffer TDS from the first rupee.

This threshold was increased from Rs 5,000 to Rs 10,000 by the Finance Act 2025, effective April 1, 2025. For FY 2026-27, the Rs 10,000 limit applies.

The threshold applies per company per shareholder. If a shareholder receives Rs 8,000 from Company A and Rs 9,000 from Company B, neither company needs to deduct TDS because the per-company amount is below Rs 10,000.

Worked Example

A private limited company pays dividends to an individual shareholder during FY 2026-27:

Once the year's aggregate exceeds Rs 10,000, the relief is lost for the whole year, so TDS applies on the entire Rs 12,000, not just the Rs 2,000 excess. The company deducts the full Rs 1,200 from the February payment, and the shareholder receives Rs 1,800 in February. Where the company expects the aggregate to cross Rs 10,000 at the start of the year, it should deduct 10% from the first payment.

DDT Abolition: What Changed from April 1, 2020

Before April 1, 2020, the company paid Dividend Distribution Tax (DDT) at an effective rate of approximately 20.56% on dividends declared. Shareholders received dividends tax-free up to Rs 10 lakh (with a 10% tax on dividends exceeding Rs 10 lakh under Section 115BBDA for certain shareholders).

From April 1, 2020:

• DDT is abolished. The company no longer pays any tax on dividends declared.
• Dividends are fully taxable in the hands of the shareholder at their applicable income tax slab rate.
• The company must deduct TDS at 10% under Section 194 before distributing dividends.
• The shareholder must include the full dividend amount in their income tax return and pay any differential tax.

For shareholders in higher tax brackets (30% or above), the effective tax on dividends increased significantly after DDT abolition. The TDS at 10% is only an advance collection. The actual liability depends on the shareholder's total income and applicable slab rate.

Deemed Dividends: Section 2(22)(e) -- Loans and Advances

The most commonly triggered deemed dividend provision for closely held private companies is Section 2(22)(e). If a closely held company grants a loan or advance to:

• A shareholder who holds 10% or more of the voting power, or
• Any concern in which such shareholder has a substantial interest (20% or more share in income/profits)

The loan or advance is treated as a deemed dividend to the extent of the company's accumulated profits.

Key Points on Section 2(22)(e)

1. Only closely held companies are covered. A closely held company is one where the public is not substantially interested (more than 50% shares held by a few individuals/entities).
2. The deemed dividend is taxable in the hands of the shareholder (or the concern receiving the loan, as applicable).
3. TDS at 10% must be deducted on the deemed dividend amount at the time of credit or payment of the loan/advance.
4. Trade advances given in the ordinary course of business are excluded. If Company A is a supplier of goods to Director X, and Company A gives a trade credit to Director X for goods purchased, this is not a deemed dividend.
5. The deemed dividend is limited to the extent of accumulated profits of the company. If accumulated profits are Rs 5 lakh and a loan of Rs 8 lakh is given, only Rs 5 lakh is treated as deemed dividend.

Practical Risk for Private Companies

Many private company directors treat their companies as personal accounts, drawing amounts for personal use and recording them as "director's loan." Every such withdrawal triggers a Section 2(22)(e) deemed dividend to the extent of accumulated profits. The company must deduct TDS at 10% on each such withdrawal.

Failure to deduct TDS on deemed dividends is a common audit finding. The Assessing Officer will add the deemed dividend to the shareholder's income, charge interest under Section 201(1A), and impose a penalty under Section 271C.

Mutual Fund Dividends: Section 194K

Dividend income from mutual fund units is not covered under Section 194. It has a separate provision under Section 194K (Section 393(1), Table Sl. No. 4(i) of the Income-tax Act 2025). The rate is 10% where the income from a fund's units exceeds Rs 10,000 in the year.

The threshold was also increased from Rs 5,000 to Rs 10,000 by the Finance Act 2025.

If you receive dividends from equity mutual funds, debt mutual funds, or hybrid funds, the AMC deducts TDS at 10% before crediting the dividend to your bank account. The amount will appear in your Form 26AS / Annual Information Statement (AIS).

Form 121: Avoiding TDS When You Have Nil Tax Liability

If a shareholder's total income (including dividends) falls below the taxable threshold, they can submit Form 121 to the company to request nil TDS deduction. Form 121 replaced Form 15G and Form 15H from April 1, 2026, under Section 393(6) of the Income Tax Act 2025.

Eligibility for Form 121

• Resident individuals of any age (Form 121 replaces both 15G for under-60 and 15H for seniors).
• Hindu Undivided Families (HUFs).
• The estimated total income for the financial year must result in nil tax liability.
• NRIs, companies, and firms are not eligible to submit Form 121.

The company must verify the declaration, assign a Unique Identification Number (UIN), and retain the form. If a valid Form 121 is submitted before the dividend payment, the company must not deduct TDS.

For details on Form 121, see our Form 121 guide.

Timing of Deduction and Deposit

TDS must be deducted at the earlier of:

• The date of credit of the dividend to the shareholder's account, or
• The date of actual payment of the dividend.

For most companies, the trigger is the date on which the dividend is credited. Once the board declares a dividend and the record date passes, the dividend becomes payable. TDS must be deducted at that point, even if the actual bank transfer happens later.

After deduction, the TDS must be deposited with the government by the 7th of the following month (30 April for tax deducted in March).

Late deposit attracts interest at 1.5% per month (or part of a month) from the date of deduction to the date of actual deposit.

Section 393 Under the Income Tax Act 2025: What Changed

From April 1, 2026, the Income Tax Act 2025 is in force. Section 194 (along with all other 194-series sections) is now consolidated into the table-driven Section 393 framework. Dividend TDS for residents is Section 393(1), Table Sl. No. 7 (10%, deducted before the dividend is distributed or paid), and the Rs 10,000 relief for individuals is in Section 393(4), Table Sl. No. 10. The rate and threshold did not change.

For the full section mapping, see our Income Tax Act 2025 section mapping guide.

Consequences of Non-Deduction or Non-Deposit

Interest on Late Deduction/Deposit

• 1% per month from the date TDS was deductible to the date it is actually deducted
• 1.5% per month from the date of deduction to the date of deposit

These come from Section 201(1A) of the 1961 Act (Section 398(3) of the 2025 Act). Interest is per month or part of a month. A one-day delay into a new month counts as a full month.

Penalty Under Section 271C

The Assessing Officer can impose a penalty equal to the TDS amount that should have been deducted.

Deemed Assessee-in-Default Under Section 201

If TDS is not deducted or not deposited after deduction, the company is treated as an assessee-in-default. The company becomes liable for the TDS amount, interest, and penalty.

However, if the company can demonstrate that the shareholder has included the dividend in their return and paid tax on it, the company is not treated as an assessee-in-default for the TDS amount (though interest liability under Section 201(1A) continues).

Filing Requirements

Dividend TDS is reported in the quarterly statement for payments to residents: Form 26Q up to FY 2025-26 and Form 140 for quarters of tax year 2026-27 onward.

Quarterly Due Dates for Form 140

After filing Form 140, the company must issue Form 131 (TDS certificate, earlier Form 16A) to each shareholder within 15 days of the due date for filing the quarterly return.

Section 80M: Deduction for Intercorporate Dividends

If your company receives dividends from another domestic company and redistributes those dividends to its own shareholders, it may be eligible for a deduction under Section 80M to avoid cascading taxation.

Under Section 80M, a domestic company that receives dividends from another domestic company can claim a deduction for the amount of dividend distributed to its own shareholders, up to one month before the due date for filing its income tax return.

How It Works

1. Company A pays Rs 10 lakh dividend to Company B.
2. Company B distributes Rs 8 lakh as dividend to its shareholders within the prescribed timeline.
3. Company B can claim a deduction of Rs 8 lakh under Section 80M. Only Rs 2 lakh (Rs 10 lakh minus Rs 8 lakh) is added to Company B's taxable income.

This prevents double taxation when dividends pass through holding company structures. However, Company B must still deduct TDS at 10% when paying dividends to its shareholders.

Common Mistakes to Avoid

1. Not deducting TDS on deemed dividends. Director loans from closely held companies are the most common missed deemed dividend. Every loan or advance to a 10%+ shareholder (or their concern) triggers Section 2(22)(e), and TDS must be deducted.

2. Applying the wrong threshold. The threshold increased from Rs 5,000 to Rs 10,000 effective April 1, 2025. If your accounting software still uses the old Rs 5,000 limit, you may be over-deducting TDS and creating unnecessary cash flow issues for shareholders.

3. Not tracking aggregate per shareholder. The Rs 10,000 threshold is on the aggregate of all dividends paid to one shareholder in the financial year. Interim dividends, final dividends, and special dividends must be aggregated per shareholder.

4. Confusing Section 194 with Section 194K. Section 194 covers dividends from company shares. Section 194K covers income (including dividends) from mutual fund units. The rates and thresholds are the same (10%, Rs 10,000), but the deductor is different (company vs. AMC). Report them under the correct code.

5. Not accepting Form 121 from eligible shareholders. If an eligible shareholder submits a valid Form 121 declaring nil tax liability, the company must not deduct TDS. Rejecting a valid declaration or deducting TDS despite it creates refund issues for the shareholder.

6. Forgetting TDS on dividend paid to partnership firms or LLPs. If a partnership firm or LLP holds shares in your company, TDS at 10% applies from the first rupee. The Rs 10,000 relief is only for individual shareholders paid otherwise than in cash.

7. Using old section codes after April 1, 2026. Under Section 393 of the Income Tax Act 2025, the new payment code system replaces old "194" references. Use the codes in the current return utility for Form 140 from Q1 FY 2026-27.

Practical Checklist for Companies Declaring Dividends

• Before declaring a dividend, confirm accumulated profits are sufficient. Dividends cannot exceed distributable profits.
• Obtain PAN from every shareholder. Without PAN, deduct at 20%.
• Check if any shareholder has submitted Form 121 (nil TDS declaration). If valid, do not deduct TDS on their dividend.
• Check if any shareholder holds a lower deduction certificate under Section 197. Apply the rate specified in the certificate.
• Maintain a shareholder-wise register tracking all dividends paid during the year. Monitor the Rs 10,000 aggregate threshold per shareholder.
• Once an individual shareholder's aggregate for the year crosses Rs 10,000, deduct 10% on the whole year's dividend (catching up on earlier payments), and on every later payment. Deduct from the first rupee for non-individual shareholders.
• Deposit TDS by the 7th of the following month. Set a recurring calendar reminder.
• File Form 140 quarterly and issue Form 131 (earlier Form 16A) within 15 days of the filing due date.
• For deemed dividends (loans/advances to 10%+ shareholders), deduct TDS at the time of credit or payment of the loan.
• Update your TDS software to use the Section 393(1) payment code framework for FY 2026-27.

Tax Garden Handles Your TDS Compliance

Tax Garden's TDS filing service tracks every dividend payment, applies the correct TDS rate and threshold, reminds you to deposit TDS before the monthly deadline, and files Form 140 each quarter.

For related topics, see our guides on TDS rate chart for FY 2026-27, TDS on interest (Section 194A), TDS on commission and brokerage (Section 194H), Form 121 TDS exemption declarations, new TDS payment codes under the Income Tax Act 2025, and the Income Tax Act 2025 section mapping guide.

Frequently Asked Questions

Is the 10% TDS on dividends the final tax on my dividend income?

No. Dividends are added to your total income and taxed at your slab rate, so the 10% TDS is only an advance. If you are in the 30% slab, you pay the difference with advance or self-assessment tax. If your income is below the taxable limit, the TDS comes back as a refund when you file your ITR.

How does the Rs 10,000 dividend threshold work if I hold shares in several companies?

The threshold applies per company, per shareholder, per financial year. Each company checks only the dividends it pays you, so Rs 8,000 from one company and Rs 9,000 from another both escape TDS. Both amounts are still fully taxable and must be reported in your return, since the threshold only decides whether tax is withheld.

Is money received on a share buyback now treated as a dividend?

Only for buybacks from 1 October 2024 to 31 March 2026. In that period the amount paid was a deemed dividend taxed at slab rates, with TDS like any other dividend, and the cost of the shares became a capital loss. Finance Act 2026 changed this from 1 April 2026 (tax year 2026-27): buyback consideration is now taxed as capital gains, not dividend, with an effective 30% rate for promoters (22% for promoter companies), so dividend TDS no longer applies to it.

Does a loan from my private company count as a dividend?

It can. Under Section 2(22)(e), a loan or advance from a closely held company to a shareholder holding at least 10% of the voting power, or to a concern in which that shareholder has a substantial interest, is a deemed dividend up to the company's accumulated profits. The company should deduct TDS on it. Genuine trade advances in the ordinary course of business are excluded.

How can I stop a company from deducting TDS on my dividend?

If your total income will be below the taxable limit, submit a nil-TDS declaration to the company before the record date: Form 15G, or Form 15H if you are 60 or older, for dividends paid up to 31 March 2026. From 1 April 2026 these are replaced by Form 121 under the Income-tax Act, 2025. You can also apply for a lower deduction certificate.

Do dividends paid to NRIs follow the same 10% rate?

No. Dividends paid to non-resident shareholders are subject to TDS under Section 195 at 20% plus surcharge and cess, or the lower rate under the applicable tax treaty if the shareholder provides a tax residency certificate, Form 10F and other required documents. The company files these in its non-resident TDS return, not the resident one.

Sources

This guide is verified against Section 194 of the Income Tax Act, 1961 (TDS on payment of dividends), Section 393(1) of the Income Tax Act, 2025 (consolidated non-salary TDS table, effective April 1, 2026), Section 2(22) of the Income Tax Act (definition of deemed dividend), Finance Act 2020 (abolition of DDT, introduction of shareholder-level dividend taxation from April 1, 2020), Finance Act 2025 (threshold increase from Rs 5,000 to Rs 10,000 effective April 1, 2025), Finance Act 2026 (buyback taxed as capital gains from April 1, 2026), Section 194K (TDS on mutual fund income), Section 80M (deduction for intercorporate dividends), Section 393(6) (Form 121 replacing Form 15G/15H), Section 206AA (TDS at 20% for no PAN), Section 201(1A) (interest on late deduction/deposit), and Section 271C (penalty for failure to deduct). Rates, thresholds, and definitions confirmed from ClearTax, Tax2win, BajajFinserv, BankBazaar, Quicko, Motilal Oswal, and IndiaFilings reference materials as of May 2026. All rates and thresholds should be verified against incometax.gov.in/iec/foportal/ before applying to specific deductions.