Dividend distribution tax on redemption of preference shares at premium

A private company planned to redemption of its preference shares issued at premium. Face false of shares Rs. 10/- each. Issued at premium Rs. 5/ each.

The board of directors recommended to redeem at premium of Rs. 10/- each.

As per the income tax act distribution tax should be remitted for the extent of the amount paid to its shareholders more thane received from shareholders.

In the above given situation to how much extent have to paid distribution tax, either Rs. 5/- or 10/-.

 

Replies (14)
Redemption of Preference Share is nothing but just like Buy Back of Shares. It's treatment would be as per Sec 115QA as follows;

Dividend Distribution Tax (DDT) would be paid as its name suggests on the Distributed income.

Distributed Income =

[Consideration paid for buy back(redemption) - Amount received at the time of Issue of Shares (Including premium)]

Therefore, it must be very clear by Now that DDT would be paid 25-10 = 10 per shares.

Rate = 23.072% [ i.e. 20% main rate + 12% SC (in all cases) + 3% EC ]
What a Fine Answer Nitesh Sir. πŸ‘ŒπŸ‘ŒπŸ‘ŒπŸ‘ŒπŸ‘Œ
Thank you. n Be Helpful to One Another! πŸ™‚
Very Clear Explanation Nitesh. Your Articles are also amazing. (especially on HUF & on Deductions )
Thank you Ms. Anjali ! I appreciate your comment. 😊
@ Nitesh How could I be more in touch with you.??
@ Anjali You can follow my blogs @ TAXEFFECTS.BLOGSPOT.COM and also mail me at niteshkbind @ gmail.com to share any ideas, suggestion or query.

Thanks.
Mr. Nitesh, The company issued preference shares @ Rs. 15/- (Face value Rs. 10/- + premium Rs. 5/-) Redemption @ Rs. 20 (face value Rs. 10/- + premium Rs.10/-) Now to what extent DDT have to pay? Consideration paid to shareholders Rs. 20/- each Amount received at time of issue Rs. 15/- My conclusion is DDT have to pay on Rs 5/- each Is it Correct.
Yes sir. Absolutely correct. That's what I explained in the previous answer a bit technically.
Very explained Mr. Nitesh. Thanks a lot.
Thank you very much.
Also wanted to understand, if the investor has got these shares for free - is he liable to pay capital gains tax? Another scenario where he sells preference shares for Rs 10 to Mr A. (FV Rs 10) After 1 year the compnay says they are redeeming Rs 2 of FV. Will Mr A have any tax liabilty? Thanks Jay

Can 0 % Reedemable preference shares are redeembed at premium ?
Whether ir is treated as a distribution liable to DDT under section 115QA ?
Or amount to Dividen under section 2(22) ?
Company is closely held company
Please reply sir ?

Redemption of Preference Shares is not just like buy-back of shares. Please prove how it is just like buy-back of shares as defined in Section 115QA?

 

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