Union Finance Minister Nirmala Sitharaman announced in Union Budget that she is abolishing Dividend Distribution Tax, commonly known as DDT on companies. She also introduced a new TDS Section 194K (TDS on Dividend Income from Equity Mutual Funds) in addition to amending the existing Section 194 (TDS on Dividend Income from Equity Shares).
As a result, confusion ensued amongst Investors, Brokerages, Companies, and AMCs. Various questions were unanswered such as who needs to deduct TDS, when to deduct TDS, rate of TDS, how to claim credit of TDS, and more.
Quicko as a tax platform helps traders and investors with their tax compliances. As we are entering into the tax filing season, it is important to have clarity on the concept of TDS on Dividend.
Abolishment of DDT
DDT i.e. Dividend Distribution Tax was a tax paid by a company on distributing dividends to its shareholders. As the tax was paid by the Company, such dividend income was exempt in the hands of the shareholder.
Since the DDT is abolished from FY 2020-21, the Dividend Income is now a taxable income and hence TDS would also be applicable.
Tax Deduction at Source (TDS) under Section 194 & Section 194K
TDS is liable to be deducted by the Company or AMC paying a dividend on or after 1st April 2020 as per the applicable section.
- Amendment of Section 194 – A provision was added to the existing Section 194. If the dividend on equity shares exceeds INR 5,000, the Company should deduct TDS at 10% under Section 194.
- Introduction of Section 194K – If the dividend on equity mutual funds exceeds INR 5,000, the AMC should deduct TDS at 10% under Section 194K.
If the PAN is invalid or not available, TDS would be deducted at 20%. In the case of a Non-Resident shareholder, TDS would be deducted at 20% (plus surcharge and cess). The shareholder can file Form 15G or Form 15H for deduction of TDS at a lower rate or Nil rate.
Is TDS applicable on Capital Gains from Mutual Funds? – CBDT Clarification
Section 194K had been introduced to deduct TDS on “Income from Mutual Funds”. There was confusion about whether the word ‘Income’ would include only dividends; or also include Capital Gains on the sale of Mutual Funds. On 4th Feb 2020, CBDT issued a clarification on this issue.
CBDT Clarification – TDS @ 10% should be deducted on Dividend Income only and not on Income from Capital Gains on the sale of Mutual Funds.
TDS Rates reduced due to COVID-19
Under the Direct Tax Measures of Atmanirbhar Bharat, the TDS Rates were slashed by 25% applicable from 13th May 2020 up to 31st March 2021. TDS Rate under Section 194 and Section 194K were also reduced for the remaining part of FY 2020-21.
|Section||Nature of Payment||Old Rate||Reduced Rate|
|Sec 194||Dividend on Equity Shares||10%||7.5%|
|Sec 194K||Dividend on Equity Mutual Funds||10%||7.5%|
Investors/traders, TDS rates on dividend u/s 194 (Equity) & 194K (Mutual Funds) slashed by 25% (i.e from 10% to 7.5%) for remainder of FY 2020-21.— Quicko (@HowToQuicko) May 13, 2020
Companies and AMCs have started sending emails to the shareholders and unitholders for distributing dividends after deducting TDS at the rate of 7.5%. It also mentions the submission of Form 15G or 15H for deduction of TDS at a lower rate. Here is the subject of a sample email:
Final Dividend for FY 2019-20 – Communication on Tax Deduction at Source (TDS) / withholding tax on Dividend
How to claim TDS Credit in ITR?
The Company would provide Form 16A i.e. TDS Certificate to the shareholders after filing the TDS Return. The shareholder can claim the credit of TDS deducted in the Income Tax Return. He/she can download Form 26AS from the account on the income tax website to view the details of the TDS Credit.
The investor should report dividend income under the head Income from Other Sources. If the TDS Credit is less than the tax liability, he/she must pay the differential amount of tax. If the TDS Credit is more than the tax liability, he/she should claim a refund of the excess TDS. For the dividend paid in FY 2020-21, TDS Credit can be claimed while filing Income Tax Return in July 2021.
We are Quicko, a team of accountants, developers and designers on a mission to simplify taxes for all. For any queries or questions comment below.