The government has made dividends distributed by a company taxable in the hands of investors from FY20-21. Companies used to deduct dividend distribution tax (DDT) before paying out dividends to shareholders. As a result, dividends received were tax-free in the hands of investors, but dividends above Rs10 lakh were taxed at 10%.
TDS under Section 194 and Section 194K was introduced for the deduction of TDS on dividends paid on equity shares and equity mutual funds. As per Sec 194, for equity and mutual funds, a Domestic Company distributing dividends to a resident should deduct TDS at a rate of 10% if the amount exceeds INR 5000. The taxpayer should report such income under the head IFOS while filing an Income Tax Return.
This quarterly filing is required in order to avoid advance tax penalties on dividend income. Dividend income is currently excluded from the interest penalty imposed by Section 234(C) for non-payment of advance tax. Because it is impossible to foresee dividend income, the government has relaxed the penalty interest on advance tax payments. Investors must now pay advance tax in the quarter in which they receive the dividend.
Read more about Tax treatment on Dividends.