All You Need to Know About Dividend Taxation in India
We explain dividend taxation in India, where from FY 2020-21 onwards, the tax incidence of dividends now falls on the shareholder instead of the company issuing the dividends.
Starting from fiscal year (FY) 2020-21 / assessment year (AY) 2021-22, the incidence of taxation on dividends has been shifted from companies to investors through changes introduced by the Finance Act, 2020. Earlier, the dividend income from a domestic company was exempted in the hands of shareholder under section 10(34) of the Income-tax Act, 1961, while the company was liable to pay dividend distribution tax (DDT) under section 115-O.
What is dividend according to India’s income tax regulation?
Dividend usually refers to the distribution of profits by a company to its shareholders. However, as per section 2(22) of the Income-tax Act, 1961, the dividend shall also include the following:
- Distribution of accumulated profits to shareholders requiring release of the company’s assets.
- 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.
- Distribution made to shareholders of the company on its liquidation out of accumulated profits.
- Distribution to shareholders out of accumulated profits on the reduction of capital by the company.
- Loan or advance made by a closely held company to its shareholder out of accumulated profits.
The dividend income shall be taxable in the following circumstances:
- Final dividend: According to section 8 of the Income-tax Act, final dividend, including deemed dividend, shall be taxable in the year in which dividend is declared, distributed, or paid – whichever is earlier.
- Interim dividend: Interim dividend is chargeable to tax on receipt basis, that is, in the year in which it is received by the shareholder.
Taxability of dividend received on or after April 1, 2020
The taxability of dividends in the hands of the company as well as shareholders from FY 2020-21 (AY 2021-22) would be as under:
Obligation of the domestic companies
Domestic companies shall not be liable to pay DDT on dividend distributed to shareholders on or after April 1, 2020.
However as per section 194 of the Income-tax Act, these domestic companies shall be liable to deduct tax at the rate of 10 percent from dividend distributed to the resident shareholders if the aggregate amount of dividend distributed or paid during the financial year to a shareholder exceeds INR 5000. It must be noted that if the dividend is payable to a non-resident or a foreign entity, the tax shall be deducted under section 195 of the Income-tax Act, in accordance with relevant double taxation avoidance agreement (DTAA).
Taxability in the hands of investors
The taxability of dividend and tax rate thereon shall depend upon many factors like residential status of the shareholders and the relevant head of income. In case of a non-resident shareholder, the provisions of DTAAs and Multilateral Instrument (MLI) shall also come into play. An individual can deal in securities either as a trader or as an investor. If shares are held for trading purposes, then the dividend income shall be taxable under the head “income from business or profession”. However, if shares are held for the purpose of investment, then income arising in nature of dividend shall be taxable under the head “income from other sources”.
Taxable in the hands of resident shareholder
Income from business or profession: Where dividend is taxable 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.
Income from other sources: Where the dividend is taxable under this head, the assessee can claim deduction of only interest expenditure that has been incurred to earn that dividend income to the extent of 20 percent of total dividend income
Applicable tax rate: The dividend income shall be chargeable at the rate of 10 percent from dividend distributed if amount of dividend to such shareholder in aggregate in the assessment year is more than INR 5000. This threshold limit of INR 5000 is not available in case of assessees other than resident individuals. This implies that in case of entities, such as HUF, Firms, LLP, and company shareholders, TDS shall be deducted on dividend payment of even INR 1. In case the PAN is not available with the resident shareholder, tax deducted at source (TDS) shall be deducted by the domestic company at the rate of 20 percent. Additionally, the Finance Act, 2021 has inserted a new section 206AB in Income-tax Act where a higher TDS at the rate of 20 percent will be deducted in case of non-filers of income tax returns (ITR).
Taxable in the hands of non-resident shareholder
A non-resident person, including FPIs and non-resident Indian citizens (NRIs), generally hold shares of an Indian company as an Investment and, therefore, any income derived by way of dividend is taxable under the head ‘other sources’ except where such income is attributable to a Permanent Establishment of such non-resident in India.
Applicable tax rate: The dividend income, in the hands of a non-resident person is taxable at the rate of 20 percent without providing for deduction under any provisions of the Income-tax Act. However, dividend income of an investment division of an offshore banking unit shall be taxable at the rate of 10 percent.
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