Taxability of Dividend in India

Taxability of Dividend

Meaning of Dividend

Dividend usually refers to the distribution of profits by a company to its shareholders. However, in view of Section 2(22) of the Income-tax Act, the dividend shall also include the following:

(a) Distribution of accumulated profits to shareholders entailing release of the company’s assets;

(b) Distribution of debentures or deposit certificates to shareholders out of the accumulated profits of the company and issue of bonus shares to preference shareholders out of accumulated profits;

(c) Distribution made to shareholders of the company on its liquidation out of accumulated profits;

(d) Distribution to shareholders out of accumulated profits on the reduction of capital by the company; and

(e) Loan or advance made by a closely held company to its shareholder out of accumulated profits

 

Taxability of dividend received up to 31.03.2020:

If a shareholder receives dividend from a domestic company then it was EXEMPT from tax under section 10(34) of the Income Tax Act.

Domestic company were liable to pay a DIVIDEND DISTRIBUTION TAX (DDT) under section 115-O.

 

Taxability of dividend received on or after 01.04.2020:

The Finance Act 2020 has shifted tax burden in the hands of shareholders/unit holders. It abolished dividend distribution tax (DDT) (Sec 115O). Now companies need not deduct Dividend Distribution Tax on dividend paid to its shareholders. However, domestic companies shall be liable to deduct tax under Section 194.

 

Taxability in hands of resident 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Section 10(34), which provides an exemption to the shareholders in respect of dividend income, is withdrawn from Assessment Year 2021-20.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 now be taxable in the hands of the shareholders. Consequently, 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.

The taxability of dividend and tax rate thereon shall depend upon many factors like residential status of the shareholders, relevant head of income.

Treatment Dividend as business income:

The income earned person from the trading activities is taxable under the head business income. Thus, if shares are held for trading purposes then the dividend income shall be taxable under the head business or profession.

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.

 

Dividend is taxable under the head other sources

If shares are held as an investment, then income arising in nature of dividend shall be 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 realizing such dividend.

 

Taxability in the hands of non-resident shareholders

Indian companies shall be liable to withhold taxes at the rate of 20% on payment of dividend to a non-resident shareholder, as per the provisions of the Act. Non-resident shareholders can claim benefit of the lower tax rate under the relevant tax treaty, provided they are ‘beneficial owners’ of the dividend income. Various tax treaties provide for a lower withholding tax rate, typically ranging from 5% to 15%.

 

Domestic co. receives dividend from another domestic co.

The provisions of section 80M removes the cascading effect by providing that intercorporate dividend shall be reduced from total income of company receiving the dividend if same is further distributed to shareholders one month prior to the due date of filing of return.

 

Obligation of Domestic Company:

Domestic companies shall not be liable to pay DDT on dividend distributed to shareholders on or after 01-04-2020.

Domestic companies shall be liable to deduct tax under Section 194.

Indian company shall deduct tax 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.

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.

Summary:

Dividen income is now taxable in the hands of receiver.

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Disclaimer: This document contains information in summary form and is therefore intended to provide updates and general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgement. We are not, by any means of this document, rendering any professional advice or services. We shall not be liable for any claims or losses of any nature, arising directly or indirectly from use of the data or material or any information in this document. On any specific matter, reference should be made to the appropriate advisor.

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