TDS Applicable on dividends for shareholders in India

Applicable TDS Provisions on Shareholders on interim dividend/ dividend in India,

In pursuant to amendments effective 1 April 2020, dividend income is taxable in the hands of shareholders. Accordingly, the Company is required to deduct tax at source on dividend payments as per the provisions of the Income-tax Act, 1961 (“the Act”).

Under the Income Tax Act, Tax Deducted at Source on dividends paid to resident shareholders is governed by Section 194. Both final dividend and interim dividend are covered because “dividend” includes any distribution of profits, whether interim or final. All the Shareholders who has wish to take the Dividend take note of the following provision:

Applicability of TDS on dividends paid

When applicable of Tax Deducted at Source on shareholders: A domestic company must deduct Tax Deducted at Source before paying any dividend (including interim) to a resident shareholder, if the total dividend exceeds the threshold limit in a financial year

TDS on dividends paid on Not applicable when:

• Dividend paid does not exceed the annual threshold and Dividend paid to LIC, GIC and other insurers, Government, Reserve Bank of India, or notified institutions and Mutual Funds u/s 10(23D)
• Dividend paid to non-residents – covered under Section 195 instead.

Tax Deducted at Source on dividends applicable Threshold Limits

• Pre‑Budget 2025: Tax Deducted at Source applied if dividend exceeded INR 5,000.
• Post‑Budget 2025 (Applicable FY 2025‑26 onwards) : Threshold increased to INR 10,000 per shareholder per FY. This Threshold Limits dividends applicable cumulatively across all dividends (interim + final) from the same company.
  • Dividend & MF income : Income from dividends & MF will be computed without allowing any deduction for interest expenditure, irrespective of any borrowing.
  • Single declaration : Investors can now submit one declaration to the depository for non-deduction of tax across all MF units, dividends, & bonds. This removes the need for multiple forms & reduces administrative burden.

Exemptions & Special Cases in case of TDS on dividends paid

• No Tax Deducted at Source if Total dividend paid in a FY ≤ INR 10,000 and Dividend paid in non-cash modes (rare cases; e.g., bonus shares).
• Form 15G / 15H : Shareholders whose taxable income is below basic exemption may submit Form 15G – Individuals below 60 and Form 15H – Senior citizens to avoid Tax Deducted at Source altogether.

Timing of TDS Deduction :

Tax Deducted at Source must be deducted at the time of credit or payment, whichever is earlier. This applies to interim dividends as well.

• Credit basis – when company records dividend payable
• Payment basis – cash, cheque, electronic transfer, etc.

Resident Shareholders

🔹 Applicable TDS Rate

• 10% Tax Deducted at Source u/s 194 of the Income-tax Act, 1961, provided a valid Permanent Account Number is available.
• No Tax Deducted at Source shall be deducted where the aggregate dividend paid/credited during the financial year does not exceed INR 10,000.

🔹 Higher Tax Deducted at Source in Certain Cases : 20% Tax Deducted at Source shall be deducted where PAN is not available, or Permanent Account Number is invalid / inoperative, including non-linking of Permanent Account Number with Aadhaar as per Section 139AA read with Section 206AA.

🔹 Cases Eligible for Nil / Lower Tax Deducted at Source  (subject to documents)

• Form 15G / Form 15H (as applicable) for FY 2025–26
• Lower / Nil deduction certificate under Section 197
• Insurance Companies (IRDA registered)
• Mutual Funds registered with SEBI and eligible under Section 10(23D)
• Entities covered under Section 196 (Government, Reserve Bank of India, statutory corporations)
• AIF Category I & II (Section 10(23FBA))
• Recognised PF / Approved Superannuation / Approved Gratuity Funds
• National Pension Trust
• Any other entity eligible for exemption under the Act (subject to documentary proof)

🔹 Transfer of Tax Deducted at Source Credit (Rule 37BA): Where the shareholder is a custodian and not the beneficial owner, a declaration under Rule 37BA must be submitted to enable transfer of TDS credit to the beneficial owner.

Non-Resident Shareholders (Including FIIs / FPIs)

Non- resident shareholders [including Foreign Institutional Investors and Foreign Portfolio Investors]

Applicable TDS : Tax is normally required to be withheld at the rate of 20% (plus applicable surcharge and cess) under section 195 or 196D, as the case may be of the Income-tax Act, 1961 subject to beneficial provisions of the relevant Double Tax Avoidance Agreement (“DTAA/Treaty”). 20% (plus surcharge & cess) under Sections 195 / 196D, subject to Double Tax Avoidance Agreement benefits.

Double Tax Avoidance Agreement Benefit (Lower Rate) : To avail treaty benefits, the following must be submitted:

• Self-attested PAN (or Rule 37BC details, if PAN not available)
• Tax Residency Certificate (TRC) for FY 2025–26
• Form 10F (mandatory online filing where PAN is available)
• Any other documents prescribed under the Act

Treatment for Non-Resident Shareholders in case of TDS on dividends :

Tax Deducted at Source NOT u/s 194. And Governed by Section 195. While Rates depend on Double Tax Avoidance Agreement (generally 10%–20% + surcharge & cess).

Special Categories of Non-Resident Shareholders

• Sovereign Wealth Funds / Pension Funds u/s 10(23FE)
• Subsidiaries of ADIA / Public Investment Fund (Saudi Arabia) (Subject to prescribed declarations and Central Board of Direct Taxes notifications)
• Lower/Nil deduction certificates u/s 197 / 195(3) may also be submitted, where applicable.
• As per Section 90 of the Act, a non-resident shareholder (including FIIs/FPIs) has the option to be governed by the provisions of the Double Tax Avoidance Agreement between India and the country of tax residence of the shareholder, if they are more beneficial to the shareholder. For this purpose i.e., to avail the tax treaty benefits, the non-resident shareholder will have to provide all of the following documents:
  • Self-attested copy of PAN allotted by the Indian Income Tax Authorities. In case PAN is not available, details as prescribed under rule 37BC of Income-tax Rules, 1962 to be furnished;
  • Self-attested copy of valid Tax Residency Certificate obtained from the Tax Authorities of the country of which the shareholder is a resident (valid for financial year 2025-26);
  • Self-declaration in Form 10F for FY 2025-26 for Non-resident shareholders who have PAN and propose to claim treaty benefit need to mandatorily file the Form 10F online at the link https://eportal.incometax.gov.in/ with effect from April 1, 2023 to avail the benefit of tax treaty. Self-declaration duly signed and stamped on letterhead enclosed herewith;
  • Self-attested copy of any other document as prescribed under the Income-tax Act, 1961 for lower withholding of taxes, if applicable
• In case of Sovereign Wealth funds and Pension funds notified by Central Government under section 10(23FE) of the Income-tax Act, 1961, the non-resident shareholder shall submit a copy of the notification issued by Central Board of Direct Taxes substantiating the applicability of section 10(23FE) of the Income-tax Act, 1961 issued by the Government of India and self-declaration along with self-attested copy of the PAN card that the conditions specified in section 10(23FE) have been complied with.
• In case of Subsidiary of Abu Dhabi Investment Authority (‘ADIA’) and Subsidiary of Public Investment Fund of the Government of the Kingdom of Saudi Arabia as prescribed u/s 10(23FE) of the Income-tax Act, 1961, the non-resident shareholder shall submit a self-declaration along with self-attested copy of the PAN card substantiating the fulfilment of conditions prescribed u/s 10(23FE) of the Act.
• Further, in case the non-resident shareholder is eligible to claim deduction of TDS at a lower/NIL rate, TDS shall be deducted at such lower/NIL rate, subject to submission of the documents specified below:
  • Lower deduction certificate u/s 197 or 195(3) as the case may be, obtained from the Income Tax Authority. In case of an Indian branch of a foreign bank, the lower deduction certificate is also to be supported with a self-declaration confirming that the income is received by the Indian branch on its own account and not on behalf of the Foreign Bank and the same will be included in taxable income of the branch in India.
  • In case any non-resident shareholder is exempted from TDS as per the provisions of Income-tax Act, 1961 or any other law such as The United Nations (Privileges and Immunities) Act 1947, etc., necessary documentary evidences substantiating exemption shall be submitted.

TDS Rates on dividends paid / To be paid

• Tax Deducted at Source shall be deducted at the rate of 10% under Section 194 of the Income-tax Act, 1961 on the amount of dividend declared and paid by the Company in the FY 2025-26 to resident shareholders provided, valid PAN of the shareholder is available. However, TDS shall be deducted at higher rates as stated below in the following circumstances
• Valid Permanent Account Number not available: If the Permanent Account Number is invalid/inoperative or valid Permanent Account Number is not available with the Company’s Register of Members, Tax Deducted at Source shall be deducted at the rate of 20% as per Section 206AA of the Income-tax Act, 1961.
• Inoperative Permanent Account Number: As per Section 139AA of the Income-tax Act, 1961, every person who has been allotted a PAN and who is eligible to obtain Aadhaar, shall be required to link the PAN with Aadhaar. In case of failure to comply with this, the PAN allotted shall be deemed to be inoperative and tax shall be deducted at the rate of 20% as per the provisions of Section 206AA of the Income-tax Act, 1961.
• Shareholders may visit https://www.incometax.gov.in/iec/foportal/help/e-filing-link-aadhaar-faqfor FAQ issued by Government on Permanent Account Number Aadhaar linking.
• Insurance Companies: No Tax Deducted at Source shall be deducted if the insurance company submits a self-Declaration certifying the details of securities held by it against which dividend is declared and certifying the fact that it is registered with IRDA and is eligible to claim the exemption under the second proviso to section 194 of the Income-tax Act, 1961. The said certificate shall also be accompanied with self-attested copy of Permanent Account Number and IRDA registration certificate.
• Mutual Funds: No Tax Deducted at Source shall be deducted if the Mutual fund submits a self-declaration certifying the details of securities held by it against which dividend is declared and certifying the fact that it is registered with SEBI and is eligible to claim the exemption u/s 10(23D) of the Income-tax Act, 1961. The said certificate shall also be accompanied with a self-attested copy of its Permanent Account Number and SEBI registration certificate.
• Other shareholders covered u/s 196: No Tax Deducted at Source shall be deducted if documentary evidences for coverage under section 196 of Income-tax Act, 1961 are submitted in respect of other shareholders covered under section 196 of Income-tax Act, 1961  such as Government, Reserve Bank of India or corporations established by Central Act which is under any law for the time being in force, exempt from income tax on its income.
• Alternate Investment Fund (AIF) Category I and II: No Tax Deducted at Source shall be deducted if self declaration that the shareholder is eligible for exemption u/s 10(23FBA) of the Income-tax Act, 1961, for exemption from Tax Deducted at Source u/s 197A(1F) and that they are established as Category I or Category II AIF under the SEBI regulations is submitted. Copy of self-attested registration documents and Permanent Account Number card should also be provided.
• Recognized Provident funds/ Approved Superannuation fund/ Approved Gratuity Fund: No Tax Deducted at Source shall be deducted if necessary documentary evidence as per Circular No. 18/2017 issued by Central Board of Direct Taxes have been submitted.
• National Pension Trust: No Tax Deducted at Source shall be deducted if self-declaration along with self-attested copy of documentary evidence supporting the exemption from Tax Deducted at Source u/s 197A(1E) of IIncome-tax Act, 1961  and self-attested copy of Permanent Account Number card is submitted.
• Any other entity entitled to exemption from Tax Deducted at Source: In case any resident shareholder (other than those specified above) is exempted from Tax Deducted at Source deduction as per the provisions of Income-tax Act, 1961 or by any other law or notification, a valid self-attested documentary evidence (e.g. relevant copy of registration, notification, order etc.) in support of the entity being entitled to exemption from Tax Deducted at Source needs to be submitted.
• No tax shall however be deducted on the dividends paid to resident individuals if aggregate dividend distributed or likely to be distributed during the financial year does not exceed Rs. 10,000/-.
• Transferring credit to the beneficial owner:- In cases where the shareholder is merely a custodian of the shares and, accordingly, not the beneficial owner of the dividend payable in respect thereof, then, in order to transfer the credit of Tax Deducted at Source to the beneficial owner of dividend income, the shareholder may provide a declaration prescribed by Rule 37BA of the Income-tax Rules, 1962. The aforesaid declaration shall contain name, address, Permanent Account Number and residential status of the person to whom credit is to be given; payment in relation to which credit is to be given; and the reason for giving credit to such person. In case any Company ask the declaration then that declaration must be provided on or before Record Date, in order to enable the Company to determine and deduct appropriate Tax Deducted at Source/withholding tax.  No surcharge or cess is added on Tax Deducted at Source on dividends paid

Compliance by Company on TDS on dividends :

Deposit TDS: By 7th of next month (30 April for March).

·       Quarterly TDS return: Form 26Q.

·       Tax Deducted at Source certificate: Form 16A, issued quarterly.

Summary Table

Tax Deducted at Source will be deducted based on the information and documents available with the Company / RTA as on the record date. Tax Deducted at Source applicability shall depend upon completeness and satisfactory review of documents. In case of higher TDS deduction, shareholders may claim refund while filing their income-tax return. Excess Tax Deducted at Source, if any, may be claimed as refund while filing the income-tax return. TDS credit shall be reflected in Form 26AS