Section 194 of the Income Tax Act enhances the efficiency of tax collection, the Income Tax Act incorporates provisions for tax deductions at the source, commonly known as TDS (Tax Deducted at Source). This system collects taxes at the time of income generation rather than at a later date, streamlining the tax process.
Section 194 of the Income Tax Act, of 1961, was significantly amended by the Finance Act of 2020. This section specifically pertains to the deduction of tax at source on dividend payments made by domestic companies. It mandates that the principal officer of an Indian company or any company that has made arrangements to declare and pay deemed dividends must deduct tax at source from the dividend amount before making any payments to residents.
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TDS Applicability: You must deduct tax from dividends paid to shareholders at the applicable rate before making any cash payment, issuing checks, or distributing amounts defined under Section 2(22) of the Income Tax Act.
Exemption Criteria: TDS under Section 194 is not applicable if:
The principal officer of the company is responsible for deducting TDS at the applicable rates for any dividend declared. This deduction should occur promptly in the following scenarios:
Under certain conditions, individuals may not face TDS deductions:
To rectify any discrepancies from prior deductions or failures to deduct during the financial year, the payer must adjust the TDS deduction under Section 194A as necessary.
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Section 194 of the Income Tax Act ensures proper taxation of dividend payments at the source. By mandating TDS, the government aims to enhance tax compliance and efficiency, reducing the burden on taxpayers during tax return filing. While there are several exemptions available, individuals and companies need to stay informed about their obligations under this section to avoid penalties.
TDS is not deducted if the dividend payment to an individual does not exceed ₹2,500 in a financial year.
The principal officer of the company declaring the dividend is responsible for deducting TDS.
Yes, you can file Form 15G or Form 15H to avoid TDS deductions if your income is below the taxable threshold.
Failure to deduct TDS as required may result in penalties and interest on the unpaid tax.
TDS deducted in March should be deposited by April 30 of the same financial year.
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