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

Dividends look like the easiest income to receive, yet they raise more tax questions than almost any other passive income. A company declares a payout, a small amount of tax is cut before the money reaches your bank account, and months later the figure on your tax statement does not match what you expected. The reason is Section 194 of the Income-tax Act, 1961, which makes the paying company responsible for deducting tax at source on dividends paid to resident shareholders. For FY 2025-26 the rate is 10 percent, and the amount below which no deduction is needed has risen to Rs 10,000 a year from Rs 5,000.

Beyond those two numbers lie several practical questions: what if you have no PAN, how do Form 15G and Form 15H help, how are non-residents and mutual fund investors treated, what must a company file and by when, and what goes wrong if it does not comply. This guide answers each of them in plain language, using FY 2025-26 as the reference year, and explains how shareholders can make sure the tax deducted is credited correctly in their own returns.

Why Does TDS on Dividends Matter So Much in FY 2025-26?

TDS on dividends matters because dividends are fully taxable in the shareholder's hands, the company is legally liable for deducting tax at source, and any gap between the two leads to notices, penalties or lost refunds. Both sides of the transaction therefore need to get it right.

Until FY 2019-20, companies paid dividend distribution tax themselves and shareholders received the money free of tax in most cases. That system ended on 1 April 2020, and every rupee of dividend is now added to the shareholder's income and taxed at the applicable slab rate. TDS under Section 194 is the mechanism that collects part of that tax at the time of payment. For a company with thousands of shareholders, it means maintaining accurate shareholder records and filing correct returns. For an investor, it means checking that the deduction shows in the tax statements and is claimed at the time of filing. Our tax health check is a good starting point for investors who are unsure of their position.

What Does Section 194 Say and Who Has to Deduct the Tax?

Section 194 says that the person responsible for paying a dividend, which in practice is the company or its registrar and transfer agent, must deduct income tax before paying it to a resident shareholder. The shareholder receives the net amount and gets credit for the tax deducted.

The provision covers dividend on equity and preference shares and is not limited to listed companies. A closely held private company that pays a dividend to its promoters must deduct tax in the same way as a listed company paying lakhs of shareholders. The company needs a Tax Deduction Account Number, must deposit the tax, must file the quarterly TDS statement and must issue a certificate to each shareholder. Where payment goes through a registrar or bank, the company stays responsible for the outcome.

The treatment of deemed dividend, such as certain loans or advances to shareholders under section 2(22), follows its own rules and needs separate analysis, so do not assume that Section 194 settles every case. For a company that wants the whole TDS process handled professionally, see our TDS return filing service.

What Are the TDS Rate and the Rs 10,000 Threshold for FY 2025-26?

For FY 2025-26, TDS on dividends paid to residents is 10 percent, and no tax is deducted if the total dividend paid to a shareholder in the year is Rs 10,000 or less and is paid by account payee cheque or electronic mode.

Consider two shareholders in the same company. One receives Rs 9,800 during the year and the other receives Rs 12,000. The first shareholder is below the threshold, so nothing is deducted. For the second, the company deducts 10 percent, which is Rs 1,200, on the full Rs 12,000, not just on the Rs 2,000 above the limit, and pays Rs 10,800.

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The threshold is applied per shareholder, per company and per financial year, and it is the total of all dividends paid in that year that counts, so an interim dividend and a final dividend are added together. The limit was Rs 5,000 until FY 2024-25 and was doubled from 1 April 2025. If a shareholder has not furnished a PAN, the deduction is at 20 percent under section 206AA. The stricter rates that applied to people who had not filed returns, under sections 206AB and 206CCA, were withdrawn from 1 April 2025, so a company no longer has to check that status for FY 2025-26 payments.

When Can a Shareholder Avoid or Reduce the TDS?

A shareholder can avoid TDS when the dividend is within the threshold, when they are a specified insurer, or when a valid declaration in Form 15G or Form 15H is on file, and can reduce it with a lower deduction certificate. These routes defer or reduce deduction, but they do not make the dividend tax-free.

Giving a false declaration is not a harmless error, since it can attract penalty.

How Are Non-Residents, Mutual Fund Investors and Buy-Backs Treated?

Non-residents, mutual fund unitholders and shareholders in a buy-back are not governed by the plain Section 194 rule. Each follows a different section, rate or reporting form, and mixing them up is a common source of wrong deduction.

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For non-resident shareholders, tax is deducted under section 195, generally at 20 percent plus applicable surcharge and cess, and the amount is reported in Form 27Q rather than Form 26Q. A lower rate may apply under a tax treaty if the shareholder provides a tax residency certificate and Form 10F, and the remittance may require Form 15CA and Form 15CB. NRIs holding Indian shares should read our guide to NRI tax filing.

Dividend income from mutual fund units is covered by section 194K, which carries the same 10 percent rate and the same Rs 10,000 threshold from 1 April 2025, and the fund house deducts it. Buy-back proceeds have been taxed as deemed dividend in the hands of shareholders for buy-backs from 1 October 2024, and tax on them is reported to be deductible under Section 194 for resident shareholders in FY 2025-26, though the treatment is expected to change from FY 2026-27 under the Income-tax Act, 2025. Because this area is changing, check the position on the date of payment. Investors who also sell shares should see our capital gain overview.

What Does a Section 194 Compliance Cycle Look Like?

A compliance cycle for dividend TDS starts before the dividend is paid and ends after the certificates are issued. The eight stages below describe the sequence that a finance team should follow each time a dividend is declared.

1. Update the Shareholder Master.

   Before payment, confirm each shareholder's PAN, status as resident or non-resident, category and bank details. Missing or wrong data creates wrong deductions that are hard to correct afterwards.

2. Separate the Special Cases.

   Tag insurers, mutual funds, non-residents and shareholders who have submitted Form 15G, Form 15H or a lower deduction certificate, so that the right rule is applied automatically.

3. Total the Dividend Per Shareholder.

   Add up all dividends for the year, including interim payments, and test the Rs 10,000 limit. Remember that crossing the limit by even a small amount means tax on the whole dividend.

4. Compute and Deduct the Tax.

   Deduct at 10 percent for residents with a PAN, 20 percent where PAN is missing and the applicable rate for non-residents. Pay out only the net amount and record the working.

5. Deposit the TDS.

   Deposit the tax by the 7th of the following month, or by 30 April for deductions made in March. Late deposit attracts interest, so schedule this in the payment run.

6. File the Quarterly Statements.

   Report resident dividends in Form 26Q and non-resident dividends in Form 27Q by 31 July, 31 October, 31 January and 31 May for the respective quarters, tying each entry to a challan. Our TDS return filing team prepares and files these.

7. Issue Form 16A.

   Issue the TDS certificate to each shareholder within 15 days of the due date for filing the quarterly statement, so that they can claim credit and match it to their own tax statements.

8. Review and Correct.

   Compare your filed data with the department's records and fix any mismatch with a correction statement. Our company compliance overview and accounting and tax compliance services cover this end to end.

Failure at any stage has a price. Interest runs at 1 percent per month for late deduction and 1.5 percent per month for late deposit, a fee of Rs 200 per day applies under section 234E for late statements up to the amount of tax, and a penalty of Rs 10,000 to Rs 1 lakh can be imposed under section 271H for non-filing or incorrect filing.

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How Has the Taxation of Dividends Changed Over the Years?

The taxation of dividends in India has alternated between taxing the receiving shareholder and taxing the distributing company, and the current system, which uses TDS under Section 194, is the latest turn in that cycle.

Frequently Asked Questions About TDS on Dividends in FY 2025-26