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nism-series-xb-section-194-tds-corporate-dividend-taxation[ INVESTMENT ADVISER (LEVEL 2) ]

Under the Income Tax Act, how are corporate dividends taxed, and what is the TDS threshold under Section 393(1) of the Income-tax Act, 2025 (the erstwhile Section 194 of the Income-tax Act, 1961)?

[ A ]Dividends are taxed in the shareholder's hands at MARGINAL INCOME TAX SLAB RATES under Section 92(2)(a); companies deduct 10.0% TDS under Section 393(1) if dividend paid to a resident exceeds ₹5,000 in a financial year.[ CORRECT ]
[ B ]Dividends are 100% tax-free with zero TDS.
[ C ]Dividends are taxed at flat 50% luxury penalty rate.
[ D ]TDS is deducted at 100% on all dividends.
Takeaway

The correct answer is A: dividends are taxed in the shareholder's hands at their marginal slab rate under Section 92(2)(a) of the Income-tax Act, 2025 (the erstwhile Section 56(2)(i) of the Income-tax Act, 1961), and companies must deduct 10% TDS under Section 393(1) (the erstwhile Section 194) once dividend paid to a resident shareholder exceeds ₹5,000 in a financial year.

Derivation
Before Finance Act 2020, companies paid Dividend Distribution Tax (DDT) at the company level, and dividends were largely tax-free for shareholders. DDT was abolished from FY 2020-21, shifting the entire tax burden onto the shareholder, who must now include dividend income in their return and pay tax at their own marginal slab rate -- which can be far higher than DDT was for high-bracket investors. To ensure compliance, Section 393(1) of the Income-tax Act, 2025 (the erstwhile Section 194 of the Income-tax Act, 1961) requires the paying company to withhold 10% TDS whenever the dividend paid to a resident individual shareholder exceeds ₹5,000 in the financial year, mirroring the mechanism used for mutual fund dividends under Section 393(1) (the erstwhile Section 194K).
Why the others fail
B — Dividends are 100% tax-free with zero TDS.
Incorrect; dividends are taxable at the shareholder's slab rate post-DDT-abolition, with TDS applying above ₹5,000 -- not tax-free with zero TDS.
C — Dividends are taxed at flat 50% luxury penalty rate.
Fabricated rate; there is no 50% flat luxury tax on dividends -- they are taxed at the shareholder's own marginal slab rate.
D — TDS is deducted at 100% on all dividends.
Overstates the withholding; TDS under Section 393(1) (the erstwhile Section 194) is 10% of the dividend above the threshold, not 100% of all dividends paid.