tax on dividend income

Tax on Dividend Income in India (w.e.f A.Y 2021-22)

Tax on Dividend Income

Meaning of Dividend

Section 2(22) of Income Tax, 1961 provides inclusive definition of the term “Dividend”. In general, dividend refers to the distribution of profits by a company to its shareholders.

According to Section 2(22), “dividend” includes—

(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ;

(b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not ;

(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not ;

(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ;

(e) any payment by a closely held company (not being a company in which the public are substantially interested), of 

  • any sum (whether as representing a part of the assets of the company or otherwise) by way of advance or loan
    • to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than 10% of the voting power, or
    • to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or
  • any payment by any such company on behalf, or for the individual benefit, of any such shareholder,

to the extent to which the company in either case possesses accumulated profits ;

but “dividend” does not include—

  (i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration, where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;

 (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ;

(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it and treated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;

(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section 77A of the Companies Act, 1956; [Section 68 of Companies Act, 2013]

(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company (whether or not there is a reduction of capital in the demerged company).

Explanation

For the purposes of this clause,—

(a) “concern” means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ;

(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previous year, beneficially entitled to not less than 20% of the income of such concern ;

Tax on distributed profits of domestic companies

Till AY 2020-21,the domestic company was liable to pay a Dividend Distribution Tax (DDT) under section 115-O of Income Tax Act, 1961, and  shareholders (who received dividend from a domestic company) was not  liable to pay any tax on such dividend as it was exempt from tax under section 10(34) of the Act.

But Finance Act, 2020 has abolished the DDT, and now dividends are taxed in the hands of the investors.

Therefore, the provisions of Section 115-O shall not be applicable if the dividend is distributed on or after 01-04-2020. Thus, if the dividend is distributed on or after 01-04-2020 the domestic companies shall not liable to pay DDT and, consequently, shareholders shall be liable to pay tax on such dividend income.

 

Taxability of Dividend received on or after 01-04-2020

Obligation of the domestic companies
On or after 01-04-2020,  domestic companies shall not be liable to pay DDT on dividend distributed to shareholders . 

 Are domestic companies liable to deduct tax on dividend distributed to shareholders?
Yes, domestic companies shall be liable to deduct tax under Section 194 at the rate of 10% from dividend distributed to the resident shareholders if the aggregate amount of dividend distributed or paid during the financial year to a shareholder exceeds Rs. 5,000.

However, no tax shall be required to be deducted from the dividend paid or payable to Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC) or any other insurer in respect of any shares owned by it or in which it has full beneficial interest. 

However, where the dividend is payable to a non-resident or a foreign company, the tax shall be deducted under Section 195 in accordance with relevant DTAA

Taxability in hands of shareholders
Section 10(34), which provides an exemption to the shareholders in respect of dividend income, is withdrawn from Assessment Year 2021-20. Thus, dividend received during the financial year 2020-21 and onwards shall be included in the total income of the assessee under the head “Income from other sources”, and now be taxable in the hands of the shareholders. 

Effect on Section 115BBDA
Section 115BBDA which provides for taxability of dividend in excess of Rs. 10 lakh has no relevance as the entire amount of dividend shall be taxable in the hands of the shareholder.

When dividend is taxable under the head Business Income (PGBP)
In case assessee is holding securities for trading purpose i.e. business purpose (as stock in trade), dividend income shall be taxable under the head business or profession. 

When dividend is taxable under the head Income from Other Sources
If shares are held as an investment then income arising in nature of dividend shall be taxable under the head other sources. Dividend received from any foreign company is always taxable under the head “Income from Other Sources”.

Taxability of Final Dividend and Interim Dividend

Taxability of Final Dividend
According to Section 8 of Income Tax Act, 1961, final dividend including deemed dividend shall be taxable in the year in which it is declared, distributed or paid by the company, whichever is earlier.

Taxability of Interim Dividend
Interim dividend is taxable in the previous year in which the amount of such dividend is unconditionally made available by the company to the shareholder. Thus, interim dividend is chargeable to tax on receipt basis.

Deductions allowed from Dividend Income

Where dividend is assessable to tax as business income 
The assessee can claim the deductions of all those expenditures which have been incurred to earn that dividend income such as collection charges, interest on loan etc.

Where dividend is taxable under the head other sources 
the assessee can claim deduction of only interest expenditure which has been incurred to earn that dividend income to the extent of 20% of total dividend income. No deduction shall be allowed for any other expenses including commission or remuneration paid to a banker or any other person for the purpose of realising such dividend.

Tax rate on Dividend Income

The dividend income shall be chargeable to tax at normal tax rates (just like any other normal income) as applicable in case of an assessee. Some Special Cases
Sections Assessee Particulars Tax Rates
Section 115AC Non-resident Dividend on GDRs of an Indian Company or Public Sector Company (PSU) purchased in foreign currency 10%
Section 115AD FPI Dividend income from securities (other than units referred to in section 115AB) 20%
Section 115AD Investment division of an offshore banking unit Dividend income from securities (other than units referred to in section 115AB) 10%
Section 115E Non-resident Indian Dividend income from shares of an Indian company purchased in foreign currency. 20%
Section 115A Non-resident or foreign co. Dividend income in any other case 20%

Deduction in respect of Inter-corporate dividend (Section 80M)

(1) Where the gross total income of a domestic company in any previous year includes any income by way of dividends from any other domestic company or a foreign company or a business trust, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividends received from such other domestic company or foreign company or business trust as does not exceed the amount of dividend distributed by it on or before the due date.

(2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.

Explanation.—For the purposes of this section, the expression “due date” means the date one month prior to the date for furnishing the return of income under sub-section (1) of section 139.

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