Clause 393 Tax to be deducted at source.

Income Tax Bill, 2025

Introduction 

The mechanism of Tax Deduction at Source (TDS) on dividend income has seen significant legislative evolution, reflecting changing tax policy, administrative convenience, and the need to address tax leakage. The Income Tax Bill, 2025, through Clause 393, seeks to consolidate and rationalize the TDS provisions across various categories of income, including dividends. Specifically, Clause 393(1)[Table: S.No. 7] prescribes the TDS regime for dividends paid to residents, while clause at 393(4)[Table: S.No.10] enlists scenarios where no TDS is required on such payments. These must be analyzed in juxtaposition with the existing Section 194 of the Income-tax Act 1961, which currently governs TDS on dividends. This commentary provides a comprehensive, issue-wise analysis of the relevant clauses, their objectives, detailed provisions, practical implications, and a comparative study with Section 194, culminating in a critical synthesis and suggestions for further refinement.

Objective and Purpose

The legislative intent behind TDS provisions on dividends is twofold: (a) to ensure efficient tax collection at the point of income accrual or distribution, thereby minimizing tax evasion and leakage; and (b) to streamline compliance for both payers and payees by providing clarity on rates, thresholds, and exemptions. The Income Tax Bill, 2025, seeks to consolidate and rationalize the TDS framework, making it more comprehensive and in line with contemporary business practices and digital payment mechanisms. The Bill also aims to address ambiguities and close loopholes that may have existed under the erstwhile regime.

The historical background reveals that prior to 2020, dividends were subject to Dividend Distribution Tax (DDT) u/s 115-O, and shareholders were exempt from tax. With the abolition of DDT and the reintroduction of classical taxation of dividends in the hands of shareholders (Finance Act, 2020), Section 194 was revived and restructured to ensure tax deduction at source on dividend payments to residents. The 2025 Bill builds on this foundation, further clarifying the scope, rates, and exemptions.

Detailed Analysis

I. Clause 393(1)[Table: S.No. 7] of the Income Tax Bill, 2025

Textual Provision:
"Any dividends (including on preference shares) declared. Any domestic company. Rate: 10%. Threshold limit: Nil. Note: The tax shall be deducted at source before making any distribution or payment of dividend."

Key Features:

• Scope: Applies to all dividends, including on preference shares, declared by a domestic company to a resident shareholder.
• Rate of TDS: 10% flat, irrespective of the quantum of dividend.
• Threshold: No minimum threshold; TDS applies to every payment unless specifically exempted under sub-section (4).
• Timing: Deduction to be made before making any distribution or payment of dividend.

Interpretation and Issues:

- The provision is broad, covering all forms of dividends (including preference shares), and applies to every resident recipient unless excluded under Clause 393(4).

- The absence of a threshold in the main clause is significant, but is subject to carve-outs in the exemption table.

- The 10% rate aligns with current practice u/s 194.

II. Clause at 393(4)[Table: S.No.10] of the Income Tax Bill, 2025

Textual Provision:
"Dividend referred to in section 393(1)(Table: Sl. No. 7). Dividend income credited or paid to: (a) the Life Insurance Corporation of India...; (b) the General Insurance Corporation of India or any of the four companies...; (c) any other insurer...; (d) a business trust...; (e) any other person as notified by the Central Government...; (f) a shareholder, being an individual, if (I) the dividend is paid by the company by any mode other than cash; and (II) amount or aggregate of amounts of such dividend distributed or paid or likely to be distributed or paid during the tax year does not exceed Rs. 10,000."

Key Features:

• Enumerated Exemptions: TDS not required in respect of dividends paid to specified institutional investors (LIC, GIC, other insurers), business trusts, notified persons, and small individual shareholders (subject to conditions).
• Individual Shareholder Exemption: For individuals, TDS is not required if dividend is paid by any mode other than cash and the total dividend does not exceed Rs. 10,000 in a tax year.
• Mechanism: The exemption is not automatic but is conditional upon the nature of payee and the manner/quantum of payment.

Interpretation and Issues:

- The provision closely mirrors the structure of existing Section 194, especially in relation to institutional investors and the small shareholder threshold.

- The move from cheque-only to "any mode other than cash" for small shareholder exemption reflects modernization in payment systems.

- The possibility of notification by the Central Government allows for administrative flexibility.

Practical Implications

For Companies (Payers)

- Obligation to Deduct: Companies must deduct TDS at 10% on all dividend payments to residents unless an exemption applies.

- Threshold Monitoring: For individuals, companies must track aggregate dividend payments to ensure the Rs. 10,000 threshold is not breached.

- Mode of Payment: Payment in cash to individuals, regardless of amount, attracts TDS; non-cash payments below threshold are exempt.

- Institutional Investors: No TDS is required for payments to LIC, GIC, other insurers, business trusts, or notified persons.

- Compliance: Timely deduction, deposit, and reporting of TDS are mandatory to avoid interest, penalties, and disallowances.

For Shareholders (Payees)

- Small Investors: Individuals receiving less than Rs. 10,000 in dividends (non-cash) from a company in a year will receive the amount without TDS.

- Institutional Investors: Specified institutions receive dividend income without TDS, improving cash flows and reducing administrative burden.

- Credit and Refunds: Shareholders can claim credit for TDS deducted in their annual tax returns.

For Tax Administration

- Widening Coverage: TDS ensures reporting and tax collection at source, especially from small or new investors.

- Reduced Evasion: The system reduces scope for under-reporting of dividend income.

- Administrative Flexibility: The ability to notify additional exempt persons allows for responsive policy adjustments.

Comparative Analysis with Section 194 of the Income-tax Act 1961

1. Structure and Clarity

- The Income Tax Bill, 2025, through Clause 393, provides a tabular and itemized approach, improving clarity and ease of reference for stakeholders.

- Section 194, while comprehensive, is more textual and embedded within the broader statute, making cross-referencing less intuitive.

2. Rate and Threshold

- Both provisions stipulate a 10% TDS rate on dividends paid to residents.

- The Rs. 10,000 threshold for individuals (non-cash payments) is retained in both, but the Bill clarifies application as "aggregate of amounts... distributed or paid or likely to be distributed or paid during the tax year," potentially reducing interpretive disputes.

3. Exemptions

- The list of exempted institutional investors is essentially identical, with both including LIC, GIC, other insurers, business trusts, and notified persons.

- The Bill provides greater specificity and flexibility by allowing the Central Government to notify further exemptions.

- The Bill also aligns the exemption for small shareholders with modern payment methods, shifting from "account payee cheque" to "any mode other than cash."

4. Administrative Mechanisms

- The Bill's tabular format and explicit cross-referencing between deduction and exemption tables facilitate easier compliance and reduce errors.

- Section 194 is more reliant on careful reading of provisos and cross-references.

5. Legislative Flexibility

- The Bill's provision for notification of additional exempt persons by the Central Government allows for greater adaptability.

- Section 194 also has a similar provision but is less explicit in its operationalization.

6. Modernization and Digitalization

- The Bill's language, e.g., "any mode other than cash," recognizes the proliferation of digital payments, NEFT/RTGS, and other non-cash methods, reflecting contemporary business realities.

- Section 194 has been amended over time to accommodate these changes, but the Bill consolidates them more coherently.

7. Procedural Aspects

- The Bill explicitly requires TDS "before making any distribution or payment of dividend," harmonizing the timing of deduction.

- Section 194 similarly requires deduction before payment, but the Bill's language is clearer.

8. Scope and Coverage

- Both apply to dividends as defined u/s 2(22) of the 1961 Act (now likely to be redefined under the new Bill).

- The Bill's approach is more comprehensive, integrating the TDS regime for dividends within a broader, uniform TDS framework.

Ambiguities and Potential Issues

1. Aggregation Across Companies

- Both regimes apply the Rs. 10,000 threshold per company, not in aggregate across all companies. This could allow individuals to receive multiple small dividends from different companies without TDS, which may be a loophole for avoidance.

2. Payment in Cash

- The insistence on TDS for any cash payment, regardless of amount, is a strong anti-abuse measure but may create compliance burdens in rare cases where cash payment is necessary.

3. Treatment of Joint Shareholders

- The provisions do not explicitly address aggregation of dividends for joint shareholders, potentially leading to interpretive challenges.

4. Notification Power

- The Central Government's power to notify additional exempt persons is essential for flexibility but could lead to lack of transparency or ad hocism unless exercised judiciously.

5. Interplay with Other Provisions

- The Bill's integration of TDS on dividends with other TDS provisions (e.g., for business trusts, mutual funds) may require careful coordination to avoid double deduction or omission.

6. Declaration for No Deduction

- The Bill allows individuals to submit a declaration for non-deduction if their total income is below the taxable limit, aligning with Section 197A of the 1961 Act.

Comparative Table: Key Features

Conclusion

The proposed Clause 393(1)[Table: S.No. 7] and clause at 393(4)[Table: S.No.10] of the Income Tax Bill, 2025, represent a logical and well-structured evolution of the TDS regime on dividend income, building upon and refining the framework established by Section 194 of the Income-tax Act 1961. The Bill retains the core principles of rate, threshold, and exemptions, while enhancing clarity, administrative efficiency, and adaptability to contemporary payment systems. The explicit tabular format, clear cross-referencing, and modernized language are substantial improvements. The alignment of exemptions and thresholds ensures continuity and minimizes disruption. However, potential issues such as aggregation across companies, treatment of joint shareholders, and the use of notification powers should be monitored and, if needed, addressed through subordinate legislation or administrative guidance. As dividend income continues to be a significant source of revenue and a sensitive area for taxpayers, the robust and transparent TDS mechanism envisaged under the Bill will contribute to both taxpayer convenience and tax administration effectiveness. Future reforms may consider further digital integration, real-time reporting, and harmonization with global best practices to ensure the system remains dynamic and equitable.

Full Text:

Clause 393 Tax to be deducted at source.