Taxation of Dividend Income - Complete Guide

Finance Act 2020 has made major amendments to the taxation of dividends. With these amendments the general notion that dividends are exempt is no longer the same. This Guide will help our fellow member CA’s, Students, and shareholders to understand the taxability of dividends.

First, let's understand the two types of dividends:

1. Interim Dividend - In simple terms, it refers to the amount paid by the company to its shareholders as dividend during the year.
2. Final Dividend - Means that the amount paid is the ultimate amount in terms of dividend for the given financial year.

Section 8 provides for the taxability of the dividends. Interim dividends are taxable only in the year of receipt; that is they shall be taxable in the year in which the are made available to the shareholders. However as far as final dividends are concerned, their tax liability arises as soon as they are declared or distributed or paid. It means that suppose they are declared in the AGM in the PY 2020-21, however they are transferred to the accounts of shareholders in PY 2021-22, then they shall be liable to tax in the PY 2020-21, the year in which they were so declared, irrespective of the fact that they were made available to the shareholders in the PY 2021-22.

Now the question arises as to in which head of income dividends shall be taxable. Here Section 56 comes to our rescue and provides that dividends shall be taxable under the head Income From Other Sources (IFOS). (It is important to understand that dividends shall be taxable under IFOS even if the same are received by a dealer in shares.) Further proviso to Section 57;provides that no deduction shall be allowed from the said dividend income towards any expenditure except the expenses towards payment of Interest, which too is capped at 20;of the said dividend income. It means that the shareholder is entitled to claim LOWER OF the following as expenditure against the dividend income-

• Actual Interest Paid OR
• 20% of the said dividend income.

Moving ahead we will now cover the deduction under Section 80M which is available to companies against certain Inter corporate dividends received. Section 80M provides that – 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.]

We shall try to analyze the section bit by bit-

• Dividend receiving company should be a domestic company.
• Dividend paying company can be a domestic company or foreign company or a business trust.

Say for example that company A is a shareholder of company B. Company B distributes dividend to its shareholders. The share of dividend of company A comes to Rs 100000. Now company A distributes Rs 200000/- dividend to its shareholders. Owing to sec 80M,Company A can claim deduction of amount of Rs.100000/- and shall be liable to deduct TDS only on the net Rs.100000/-, provided that company A distributes/pays the said dividend one month prior to the due date u/s 139(1).

Finally we now arrive at the provisions of TAX DEDUCTION ON SOURCE (TDS) on payment of dividends, which is governed by Section 194.

Section 194 provides the following-The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment ⁴²[by any mode] in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax ⁴³[at the rate of ten percent] :

Provided that no such deduction shall be made in the case of a shareholder, being an individual, if-

(a) the dividend is paid by the company by ⁴⁴[any mode other than cash]; and

(b) the amount of such dividend or, as the case may be, the aggregate of the amounts of such dividend distributed or paid or likely to be distributed or paid during the financial year by the company to the shareholder, does not exceed ⁴⁵[five thousand] rupees:

Provided further that the provisions of this section shall not apply to such income credited or paid to-

(a) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), in respect of any shares owned by it or in which it has full beneficial interest;

(b) the General Insurance Corporation of India (hereafter in this proviso referred to as the Corporation) or to any of the four companies (hereafter in this proviso referred to as such company), formed by virtue of the schemes framed under sub-section (1) of section 16 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972), in respect of any shares owned by the Corporation or such company or in which the Corporation or such company has full beneficial interest;

(c) any other insurer in respect of any shares owned by it or in which it has full beneficial interest;

ANALYSIS

• Rate at which tax shall be deducted is 10% in case of resident shareholders.
• No tax will be deducted where-

1. Payment is made by a mode other than cash AND aggregate amount of such dividend paid or likely to be paid is upto 5000/-

2. Dividend is paid to LIC/GIC/ any other insurer where it has full beneficial interest.

Disclaimer: The views expressed are strictly of the author. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.