Payment and Declaration of Dividend
This query is : Resolved
21 July 2022
Sir,
My Company has to declare dividend for the financial year 2021-22 out of the profit of the current financial year. Whether this dividend expense was allowable under income tax act. Whether it was taxable in the hands of the company or shareholder.
My Company has to declare dividend for the financial year 2021-22 out of the profit of the current financial year. Whether this dividend expense was allowable under income tax act. Whether it was taxable in the hands of the company or shareholder.
09 July 2024
Under the Income Tax Act, dividend payments by a company are treated differently depending on whether it is distributing dividends to its shareholders or receiving dividends from other companies.
Here’s how it generally works:
1. **Dividend Distribution Tax (DDT):** Until the financial year 2019-20, the company declaring dividends was required to pay Dividend Distribution Tax (DDT) on the dividends declared. This was applicable irrespective of the taxability in the hands of the shareholder. However, with effect from April 1, 2020 (FY 2020-21), DDT has been abolished. Therefore, the company does not need to pay DDT anymore.
2. **Taxability in the Hands of the Company:** The dividend declared by your company is not deductible as an expense for income tax purposes. It is considered a distribution of profits and is not allowed as a deduction from the company’s taxable income.
3. **Taxability in the Hands of Shareholders:** Prior to FY 2020-21, dividends were exempt in the hands of shareholders up to a certain limit under section 10(34) of the Income Tax Act. However, from FY 2020-21 onwards, dividends received by shareholders are taxable in their hands as per their applicable income tax slab rates.
Since DDT has been abolished, the company is now required to pay tax on the dividends distributed to shareholders at the rate of 15% plus applicable surcharge and cess as per Section 115-O of the Income Tax Act. However, this tax is grossed up before payment of dividends.
Therefore, while dividend declaration does not qualify as an expense for tax deduction purposes for the company, it is taxed differently in the hands of the shareholders based on current tax laws. It’s advisable to consult with a tax advisor or CA to understand specific implications based on your company's financials and shareholder structure.
Here’s how it generally works:
1. **Dividend Distribution Tax (DDT):** Until the financial year 2019-20, the company declaring dividends was required to pay Dividend Distribution Tax (DDT) on the dividends declared. This was applicable irrespective of the taxability in the hands of the shareholder. However, with effect from April 1, 2020 (FY 2020-21), DDT has been abolished. Therefore, the company does not need to pay DDT anymore.
2. **Taxability in the Hands of the Company:** The dividend declared by your company is not deductible as an expense for income tax purposes. It is considered a distribution of profits and is not allowed as a deduction from the company’s taxable income.
3. **Taxability in the Hands of Shareholders:** Prior to FY 2020-21, dividends were exempt in the hands of shareholders up to a certain limit under section 10(34) of the Income Tax Act. However, from FY 2020-21 onwards, dividends received by shareholders are taxable in their hands as per their applicable income tax slab rates.
Since DDT has been abolished, the company is now required to pay tax on the dividends distributed to shareholders at the rate of 15% plus applicable surcharge and cess as per Section 115-O of the Income Tax Act. However, this tax is grossed up before payment of dividends.
Therefore, while dividend declaration does not qualify as an expense for tax deduction purposes for the company, it is taxed differently in the hands of the shareholders based on current tax laws. It’s advisable to consult with a tax advisor or CA to understand specific implications based on your company's financials and shareholder structure.
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