Section 194 of ITA, 1961 : Section 194: Dividends

Explanation using Example

Imagine a scenario where XYZ Private Ltd., an Indian company, declares a dividend of INR 3,000 to its shareholder, Mr. Raj, who is a resident of India. As per Section 194 of the Income-tax Act, 1961, XYZ Private Ltd. is required to deduct tax at source (TDS) from this dividend payment before issuing the dividend to Mr. Raj.

However, if Mr. Raj had received or was going to receive dividends amounting to less than or equal to INR 2,500 during the financial year, and the company pays the dividend using an account payee cheque, then XYZ Private Ltd. would not have to deduct TDS on the dividend paid to Mr. Raj.

In another instance, if the shareholder was the Life Insurance Corporation of India (LIC) and the dividend was paid on shares owned by LIC, Section 194 would not mandate XYZ Private Ltd. to deduct TDS on the dividend payment made to LIC as per the exemptions provided in the Act.