Income Tax on Dividends
Income Tax on Dividends
A dividend is a sum paid to a shareholder of a company proportionate to the person’s shareholding in the company. A taxpayer can receive dividend-income from domestic companies, foreign companies or from mutual funds. The budget 2020 has made important changes in the manner of taxability of dividends. Until 31.03.2020, dividends declared by companies were liable for dividend distribution tax. However, with effect from 01.04.2020, dividend distribution tax has been abolished, and the dividends will be taxable in the assessment of the shareholders. Since the dividend amount is taxable in the assessment of the individual taxpayer, the basic exemption limit benefit is available for the dividend income. Hence, for the year financial year 2020-21, dividends upto Rs.2.5 lakhs are non-taxable.
Dividend Received from a Domestic Company
Dividend announced by a private limited company, one person company or limited company incorporated in India fall under the category of “Dividend declared by a Domestic Company”. Until 31.03.2020, under the Income Tax Act, any amount declared, distributed or paid by a domestic company by way of dividends is exempt from Income Tax and dividend distribution tax is levied on the dividends declared or distributed in the hands of a dividend-paying company rate than the dividend receiving shareholder. Thus, when a dividend-paying company has paid dividend distribution tax on the dividends declared or distributed, the dividend would be exempted from Income Tax in the hands of the recipient. However, with effect from 01.04.2020, it is the shareholder who should pay the tax on the dividend income which the individual taxpayer receives, over and above the basic exemption limit. Further, as per Section 115BBDA, in the case of a “specified assessee” dividend received by a shareholder would be chargeable under Income Tax at the rate of 10%, if the aggregate amount of dividend received from a domestic company during the year exceeds Rs. 10,00,000. A specified assessee means a person other than:
- A domestic company; or
- A fund or institution or trust or any university or other educational institution or any hospital or other medical institution.
- A trust or institution registered under section 12A or section 12AA.
Dividend Received from a Foreign Company
Dividend received from a foreign company is taxable under the head “Income from Other Sources” when received by a resident taxpayer. As divided received from a foreign company is added to the head “Income from Other Sources”, the taxpayer will be charged income tax at the rates applicable to the taxpayer.
Foreign Company Dividends Received by an Indian Company
Dividend received by an Indian company from a foreign company is charged under the head “Income from Other Sources” and taxed at the Income Tax rate applicable for companies. Since companies are normally taxed at 30%, dividend received from a foreign company would also be taxed at 30% in the hands of an Indian company. However, a special concession in Income Tax rate is provided under section 115BBD for dividends received by Indian companies that hold 26% or more shareholding in the Foreign Company that declared the dividend. Dividend received by an Indian company from a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital is taxable at a concessional flat rate of 15% (plus surcharge and cess as applicable).
Dividends Double Taxation Avoidance
Relief from double taxation on foreign company dividends can be claimed by taxpayers if the dividend received is taxed in India and in the country to which the foreign company belongs. Double taxation avoidance of dividends received from a foreign company must be based on the Double Taxation Avoidance Agreement, entered into between the Government of India and that country (if any). If there is no Double Taxation Avoidance Agreement with the foreign country, then the taxpayer can claim relief under section 91.
Divided or Income distributed by Mutual Funds
Any income received by a taxpayer in respect of units from the Administrator of a specified undertaking or a specified company or Mutual Fund specified under Clause (23D) will be exempt from Income Tax. Any income of a mutual fund registered under the SEBI Act, 1992 is exempt from income tax under Section 10 (23D) of the Income Tax Act, 1961. Thus, any income generated by the fund through investments, either in the form of capital gains (short term or long term), dividends or interest is exempt from income tax. However, this benefit stands withdrawn with effect from 01.04.2020.