Understanding the New Dividend Tax Regime

The dividend distribution tax has been abolished from 1 April 2020. Dividend to be taxed in the hands of shareholders at the rates applicable as per Income Tax Act, 1961 (the Act), or as per tax treaty or Act whichever is more beneficial (incase of NR shareholders). However, dividends received by a shareholder on or after 1st April 2020, on which DDT has been paid before 1st April 2020, is exempt in the hands of a shareholder to remove double taxation.

Taxability of dividends in the hands of shareholders:

Understanding the New Dividend Tax Regime

Status of recipient/shareholder	Rate of tax	Relevant section
Resident companies Under old tax regime Under new tax regime	34.94% / 29.12% 25.17% / 17.16%	Part I of first schedule to FA, 2020 Section 115BAA / Section 115BAB
Resident individual and HUF	Upto 42.74%	Part I of first schedule to FA, 2020
LLPs	34.94%	Part I of first schedule to FA, 2020
Non-resident assesses including foreign companies	21.84% or rate as per tax treaty, whichever is more beneficial	Section 115A

Many tax treaties provide taxability of dividends at the rate of 10% -15% (like treaty with Cyprus, Germany, China, Australia, Luxembourg, UK, etc.) Treaty benefits could be availed in such cases.

Distribution of dividend by an Indian company will be subject to withholding tax, as under:

Category of recipient/ shareholder

Rate of withholding (including surcharge and cess)

Relevant section

Resident shareholder

10%

Section 194

Non-residents

21.84% or rate as per tax treaty, whichever is beneficial

Section 195 read with Part II of first schedule to FA, 2020

Elimination of cascading effect on dividend received from the Indian company. Section 80M introduced for domestic companies that have declared dividend and are also in receipt of the dividend from another domestic company or foreign company or a business trust. A deduction is allowed with respect to the dividend received as long as the same is distributed as dividend one month prior to the due date of filing return.

Section 57 of the Act, restricts the deduction of interest expense up to 20% of dividend income and no deduction at all for other expenses incurred

Return filing obligation: Non-resident shareholder is not liable to file a tax return in India if the dividend income is subject to withholding tax in India at a rate not less than domestic tax rate (i.e. 20%)