Dividend Income from Foreign Company

Dividend income which is received from a foreign company is fully taxable in India as per the Income Tax Act. On the other hand, dividend received from an Indian company that was subject to dividend distribution tax is exempt from tax according to Section 10(34). However, according to Section 115BBDA, which is applicable to resident individual or HUF or firm, the dividend received shall be chargeable at the rate of 10%. The section shall apply only if the aggregate amount of dividend received from a domestic company during the year is in excess rupees ten lakhs. In this article, we review the tax treatment for dividend received.

What is Dividend Income?

A dividend is inclusive of the following payments or distribution of a company’s accumulated profits:

Any distribution which involves the release of all or any part which relates to the company's assets
Any distribution of debentures, debenture stock, or deposit certificates in any form with or without interest
Any distribution to its preference shareholders with reference to bonus shares
Any distribution related to the liquidation of a company with the exception of the shareholder not being entitled to take part in the surplus asset in the case of liquidation
Any distribution with reference to a company’s reduction of capital of a with the exception of the case of the shareholder not being entitled to participate in the surplus assets in the case of liquidation
Any payments made in the form of loans or advances that are made by a company in which public are not substantially interested
Any payment made to the company's shareholder who is the advantageous owner of shares; however, the shareholder shall not hold less than 10% of voting power in the company; further, the payment would not be considered dividend, if it is made in the normal course of business, and money lending is a substantial part of the company’s business

Dividend Income from Foreign Company

Only dividend received from an Indian company is exempt from income tax. Dividend income received from a foreign company is taxable in the hands of the Indian resident. Such dividends received by Indian residents are charged under the category “Income from other sources”. Hence, a dividend that is received from a foreign company will be included in the tax payer’s total income and will be taxable at the income tax rate applicable to the taxpayer.

Double Taxation Relief

In case the dividend received by the Indian resident was already taxed, then the taxpayer should consider the provisions of income tax law and the provisions of

Double Taxation Avoidance Agreement (DTAA) entered into with that country. If a dividend received from a foreign company has experienced the burden of double taxation, then the taxpayer can claim double taxation relief according to the requirements of the Double Taxation Avoidance Agreement. Section 91 allows the assessee to claim relief in relation to DTAAs.

Concessional Rate for Related Companies

Indian companies are charged income tax at the rate of 30% in addition to surcharge and cess as applicable. Hence, the dividend received from a foreign company is also charged tax at 30% in the hands of an Indian company. However, there is a concessional rate of tax with respect to the dividend received by an Indian company from a foreign company, if both are related. If the Indian Company holds 26% or more in the nominal value of the equity share capital of the foreign company, then dividend received from that related company is taxed at a flat rate of 15% in addition to surcharge and cess as applicable. The objective of introducing the provision is that when two companies are related, there should not be an undue financial tax-burden placed on the company receiving the dividend income.

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Frequently Asked Questions

Common questions about Dividend Income from Foreign Companies: Tax Implications.

Dividend income received from a foreign company by an Indian resident is fully taxable under the head 'Income from Other Sources'. Such dividend income will be included in the taxpayer's total income and taxed at the applicable income tax rate.

Yes, if the dividend received from a foreign company has already been taxed, the taxpayer can claim double taxation relief under Section 91 of the Income Tax Act or the relevant Double Taxation Avoidance Agreement (DTAA) between India and that country, subject to fulfilling the prescribed conditions.

If an Indian company holds 26% or more of the nominal value of the equity share capital of a foreign company, the dividend received from that related foreign company is taxed at a concessional flat rate of 15% (plus applicable surcharge and cess) instead of the regular corporate tax rate of 30%.

Dividend income received from an Indian company by a resident individual, HUF, or firm is exempt from tax up to Rs. 10 lakh. However, if the aggregate dividend income exceeds Rs. 10 lakh, it is taxable at a flat rate of 10% under Section 115BBDA.

The Income Tax Act defines dividend as any distribution of accumulated profits, release of assets, distribution of debentures or bonus shares, payments related to liquidation or reduction of capital, loans or advances from a company (in certain cases), and payments to shareholders holding substantial voting power (subject to conditions).

No, dividend income from a foreign company cannot be claimed as a deduction. It is taxable under the head 'Income from Other Sources' and will be included in the taxpayer's total income for the year.

The tax treatment of dividend income from a foreign company is generally the same for resident and non-resident individuals. However, the applicable tax rates and deductions may differ based on their residential status and the provisions of the relevant DTAA, if any.

The objective behind providing a concessional tax rate for dividend income received by an Indian company from a related foreign company is to avoid undue financial tax burden when two companies are related and have substantial cross-holdings.

Yes, dividend income received by an Indian company from a foreign company is taxable at the regular corporate tax rate of 30% (plus applicable surcharge and cess), unless the conditions for the concessional rate of 15% are met.

No, dividend income received from a foreign company by an Indian resident (individual, HUF, firm, or company) is not exempt from tax in India. It is taxable under the Income Tax Act, either at the applicable income tax rate or the concessional rate, depending on the specific circumstances.