We discuss dividend taxes in India, where the tax incidence of dividends now falls on the shareholder rather than the company issuing the dividends beginning in FY 2020-21.
The incidence of taxation on dividends has been changed from companies to investors beginning in fiscal year (FY) 2020-21 / assessment year (AY) 2021-22 due to changes made by the Finance Act, 2020.
Previously, a domestic firm’s dividend income was exempt in the hands of shareholders under section 10(34) of the Income-tax Act, 1961. In contrast, the corporation was subject to dividend distribution tax (DDT) under section 115-O.
According to Indian income tax regulations, what is a dividend?
The term “dividend” usually refers to its profit distribution to its shareholders. The dividend, however, must additionally contain the following items under section 2(22) of the
Income-tax Act of 1961:
The company’s assets must be released to distribute accrued earnings to shareholders.
- Out of the company’s accumulated profits, debentures or deposit certificates are distributed to shareholders, and bonus shares are issued to preference shareholders.
- The accrued earnings were distributed to the stockholders on the company’s liquidation.
- Profits from the company’s capital decrease are distributed to shareholders as dividends.
- A loan or advance granted to a shareholder by a closely held corporation out of its accumulated profits.
In the following scenarios, dividend income is taxable:
Final dividend: Final dividends, including considered bonuses, are taxable in the year they are declared, dispersed, or paid, whichever comes first.
Interim dividends are taxed on a receipt basis, meaning they are taxed in the year the shareholder receives them.
Dividends received on or after April 1, 2020, are taxable
From FY 2020-21 (AY 2021-22) onwards, dividends in the hands of the firm and shareholders will be taxed as follows:
Domestic enterprises are obligated to do so.
On or after April 1, 2020, domestic enterprises will not be required to pay DDT on dividends issued to shareholders.
However, suppose the aggregate amount of dividend issued or paid to a shareholder during the financial year exceeds INR 5000. In that case, these domestic corporations are obligated to deduct tax at the rate of 10% from dividends distributed to resident shareholders under section 194 of the Income-tax Act. It’s worth noting that if the dividend is paid to a non-resident or a foreign entity, the tax will be deducted under section 195 of the Income Tax Act, following any applicable double taxation treaties (DTAA).
Taxability In the hands of Investors
The taxability of dividends and the rate at which they are taxed will be determined by several criteria, including the shareholders’ residence status and the relevant head of income. The provisions of DTAAs and the Multilateral Instrument (MLI) will also apply in the case of a non-resident shareholder. As a trader or an investor, an individual can deal in securities. Dividend income is taxable under the heading “income from business or profession” if shares are retained for trading purposes. If, on the other hand, shares are held for investment, dividend income is taxed under the heading “income from other sources.”
Taxable In the hands of a resident shareholder
Income from a Business Or Profession: If a dividend is taxed as business income, the assessee can deduct all expenses incurred to earn that dividend income, such as collection fees, interest on a loan, and so on.
Income from Other Sources: Where a dividend is taxable under this section, the assessee can deduct just the interest expense spent to earn up to a maximum of 20% of total dividend income.
Applicable Tax Rate: Dividend income is taxed at a rate of 10% from dividends issued if the total amount of dividends paid to such shareholders in the assessment year exceeds INR 5000. In the case of assessees who are not residents, the INR 5000 threshold limit is not applicable. This means that TDS will be deducted on dividend payments of even INR 1 for entities like HUFs, firms, LLPs, and corporate shareholders. If the resident shareholder does not have a PAN, the domestic company must deduct tax deducted at source (TDS) at a rate of 20%. In addition, the Finance Act of 2021 included a new section 206AB to the Income-tax Act, which requires non-filers of income tax returns to pay a higher TDS rate of 20%. (ITR).
Taxable in the hands of a non-resident shareholder
A non-resident person, including FPIs and non-resident Indian citizens (NRIs), holds shares of an Indian firm as an investment. As a result, any dividend income is taxed under the head “other sources” unless it is related to a non-Permanent resident’s Establishment in India.
Dividend income in the hands of a non-resident person is taxable at a rate of 20%, with no deductions available under the Income-tax Act. Dividend income from an offshore banking unit’s investment division, on the other hand, is taxable at a rate of 10%.
