Updated on: January 24th, 2025 12:00 AM

Tax Planning over Dividends

Dividends are a crucial aspect of shareholder returns and company distributions. They refer to payments or distributions made by a company to its shareholders from its accumulated profits. These distributions can take various forms, including shares, debentures, loans, or even distributions on liquidation or capital reduction. Dividends can also include advances or loans to shareholders with significant voting power. Understanding the tax implications and eligibility criteria for dividends is essential, as dividend income may be taxable depending on when it is declared or distributed. This article explores the concept of dividends, what is corporate dividend tax, their different types, dividend policy in tax planning, and the specific regulations surrounding them under the Income Tax Act, 1961. 

What is the dividend?

The following distributions or payments by a company to the shareholders are deemed as dividends to the extent of accumulated profits of the company:

• Any  distributions of debentures, debenture stock, or deposit certificates and any distribution to the preference of shareholders of shares by way of the bonus;
• Any distribution that is made to the shareholders on the liquidation,
• Any distribution on the reduction of the capital
• Any payment by a company by way of advance or

Loan to a shareholder ( being a person who is the beneficial owner of shares) having 10% of the voting power or to any concern in which such shareholder is a member or a partner and is beneficially entitled to not less than 20% of the income of the concerned person. For this kind of distribution of payment, a dividend policy in tax planning is applicable.

What is Corporate Dividend Tax?

Corporate dividend tax is the tax levied on a company's profits before distributing dividends to its shareholders. Under Section 115-O of the Income Tax Act, 1961, domestic companies are required to pay an additional tax of 15% on the dividend declared, distributed, or paid out of either current or accumulated profits after 1st April 2003. This tax planning relating to dividend policy is charged on the company’s total income and is separate from the shareholders' tax obligations. The tax is intended to ensure that profits are taxed at the corporate level before they are distributed as dividends.

Tax eligibility for Dividend Income

Here is a tax planning regarding dividend policy outlined:

• The dividend income becomes taxable in the previous year in which it is declared, distributed, or paid.
• The interim dividend is also deemed to be the income of the previous year in which it is distributed or paid.
• Dividend paid by an Indian Company that is based outside in India and it shall be deemed to accrue or arise in India.

Income tax by the company on dividend

Tax planning regarding dividend policy: Section 115-0 of the Income Tax Act 1961 - Notwithstanding anything that is contained in any other provisions of this Act and is subjected to the provisions of this section, with additional income tax chargeable concerning the total income of a domestic company for any assessment year, an amount that is declared, distributed or is paid by such company as dividends on or after the 1^st day of April 2003 but on or before the 31^st day whether out of current or accumulated profits should be charged the additional income tax of 15%. Provided that concerning the dividend that is referred to in sub-clause (e) of clause (22) of section 2 in this subsection should have it in words.

Dividends received are an exempted income in the hands of the customer

Apart from dividend policy in tax planning, Sec 115 BBDA of the Income-tax Act 1961, If the person resident in India is receiving dividends in aggregate exceeding ten lakh rupees from a domestic company or companies, then he will be liable to the taxes as follows:

• 10%  on exceeding ten lakh rupees plus surcharge
• 4 % as health and education cess.
• Bonus shares
• Issuance of bonus shares to the equity shareholders, companies can avoid the tax under section 115-O on the dividend distributed.
• When redeemable preference shares are issued as a bonus on the redemption the amount shall be taxed as dividend distributed.
• When bonus shares are issued to the preference shareholders on their issue it is deemed to be a dividend and liable to tax when the shareholder sells the bonus shares, the cost of bonus share is taken as nil

Inter-corporate dividend

When a domestic company receives the dividend ( which also includes the deemed dividend) from another company, it is exempted under section 10(34).

Tax planning relating to dividend policy by the issue of bonus debentures instead of bonus shares  

Following are the important points to understand this connection:

• The interest on the debentures is deductible in computing income
• A company can issue bonus debentures if it wants to distribute deferred dividend

Important Notes on Tax Planning relating to Dividend policy

No Dividend Distribution Tax (Amendment to Sections 115O, 115R, 10(34),10(35)

The decision to remove the concept of dividend distribution tax under section 115O  ( For companies and 115R (From Mutual Funds). The amendment applies to the dividend that is received after 01/04/2020. Now the dividend is taxable in the hands of the recipients. The dividend is not exempt in the hands of the recipient u/s 10(34) & 10(35).  The initial ceiling was Rs. 10 lakh, Deduction u/s 57 can be claimed maximum of up to 20% of such dividend.

New Section 80 M introduction

Where the gross total income of a domestic company in any previous year includes any income by way of the dividends from any other domestic company or a foreign company or a business trus5t there shall according with and should be subject to provisions of this section be allowed in computing the total income of a domestic company, a deduction of the amount that is equal to the amount of income by the way of dividends that are received from such domestic companies or foreign company or business trust as it does not exceed the amount of the dividend that is distributed it on before the due date.

TDS u/s 194

TDS u/s 194 to be deducted by the companies on the dividend that is exceeding the limit of Rs.5000 per payee. The TDS needs to be deducted from the amount of such dividend, income tax, at 10%.

Tax planning regarding dividend policy by issuing bonus debentures instead of bonus shares

• The interest on dentures is deductible in computing income
• A company can issue the bonus debentures if it wants to distribute deferred dividends.