The dividend is the amount received by an investor on account of holding shares in a company. In simple words, it is the distribution of profits of the company to its shareholders. However, in view of Section 2(22) of the Income-tax Act, the dividend shall also include the following:
(a) Distribution of accumulated profits to shareholders entailing release of the company's assets;
(b) Distribution of debentures or deposit certificates to shareholders out of the accumulated profits of the company and issue of bonus shares to preference shareholders out of accumulated profits;
(c) Distribution made to shareholders of the company on its liquidation out of accumulated profits;
(d) Distribution to shareholders out of accumulated profits on the reduction of capital by the company; and
(e) Loan or advance made by a closely held company to its shareholder out of accumulated profits.
Up to Assessment Year 2020-21, if a shareholder gets dividend from a domestic company then no taxability of dividend in hand of shareholder as it is exempt from tax under section 10(34) of the Act. However, in such cases, the domestic company is liable to pay a Dividend Distribution Tax (DDT) under section 115-O. The Finance Act, 2020 has abolished the DDT and move to the classical system of taxation wherein taxability of dividends are arise in the hands of the investors. Now for an individual shareholder, dividend shall be taxable as per the applicable slab rates.
So therefore, the provisions of Section 115-O shall not be applicable if the dividend is distributed on or after 01-04-2020. Thus, if the dividend is distributed on or after 01-04- 2020 the domestic companies shall not liable to pay DDT and shareholders shall be liable to pay tax on such dividend income. As dividend would now be taxable in the hands of the shareholder, various provisions of the Act have been revived such as allowability of expenses from dividend income, deductibility of tax from dividend income, treatment of inter-corporate dividend, etc.
(a) Taxability of dividend and Obligation of the domestic companies:-
The domestic companies shall not be liable to pay DDT on dividend distributed to shareholders on or after 01-04-2020. So dividend are not taxable in hand of company. However, domestic companies shall be liable to deduct tax under Section 194. So there is no taxability of dividend in the hand of company on or after 01-04-2020.
Section 194- shall be applicable to dividend distributed declared or paid on or after 01-04-2020. As per this section, an Indian company shall deduct tax (TDS) at the rate of 10% from dividend distributed to the resident shareholders if the aggregate amount of dividend distributed or paid during the financial year to a shareholder exceeds Rs. 5,000. However, no TDS shall be required to be deducted by company from the dividend paid or payable to Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC) or any other insurer in respect of any shares owned by it or in which it has full beneficial interest.
Section 195- In the case where dividend received by non-resident shareholder then tax shall be deducted by company under Section 195. Dividend payment to non –resident shareholders is subject to taxability of withholding tax at rate of 20% increased by surcharge and health and education cess of 4%. A lower rate for tax may apply if benefit of the tax treaty /DTAA is available to shareholders.
(b)Taxability of dividend in hands of shareholders:-
Dividend can be taxable under head Income from other sources or Business Income. If shares are held for trading purposes then taxable as business income and if shares are held as an investment then taxable as Income from other sources.
Section 10(34) which provides an exemption to the shareholders in respect of dividend income, is withdrawn from Assessment Year 2021-20. Due to such, dividend received during the financial year 2020-21 and onwards shall now be taxable in the hands of the shareholders. Consequently, Section 115BBDA which provides for taxability of dividend in hand of shareholders in excess of Rs. 10 lakh has no relevance as the entire amount of dividend shall be taxable in the hands of the shareholder.
The taxability of dividend in hand of shareholder and tax rate thereon shall depend upon many factors like residential status of the shareholders, relevant head of income. In case of a non-resident shareholder, the provisions of Double Taxation Avoidance Agreements (DTAAs) and Multilateral Instrument (MLI) shall also come into play.
(c)Taxable in the hands of resident shareholder:-
A resident shareholder can deal in securities either as a trader or as an investor. The income earned by him from the trading activities is taxable under the head business income. Thus, if shares are held for trading purposes then the dividend income shall be taxable under the head business or profession. Whereas, if shares are held as an investment then income arising in nature of dividend shall be taxable under the head other sources.
Income taxable under the head Profits and gains of business or profession, is computed in accordance with the method of accounting regularly followed by the assessee. For the purpose of computation of business income, a taxpayer can follow either mercantile system of accounting or cash basis of accounting. However, the method of accounting employed by the assessee does not affect the basis of charge of dividend income as Section 8 of the Act provides that final dividend including deemed dividend shall be taxable in the year in which it is declared, distributed or paid by the company, whichever is earlier. Whereas, interim dividend is taxable in the previous year in which the amount of such dividend is unconditionally made available by the company to the shareholder. In other words, interim dividend is chargeable to tax on receipt basis.
Deductions from dividend income:- Where dividend is assessable to tax as business income, the assessee can claim the deductions of all those expenditures which have been incurred to earn that dividend income such as collection charges, interest on loan etc.
Whereas if dividend is taxable under the head other sources, the assessee can claim deduction of only interest expenditure which has been incurred to earn that dividend income to the extent of 20% of total dividend income. No deduction shall be allowed for any other expenses including commission or remuneration paid to a banker or any other person for the purpose of realising such dividend.
Tax rate on dividend income:- The dividend income shall be chargeable to tax at normal tax rates as applicable in case of an assessee except where a resident individual, being an employee of an Indian company or its subsidiary engaged in Information technology, entertainment, pharmaceutical or bio-technology industry, receives dividend in respect of GDRs issued by such company under an Employees' Stock Option Scheme. In such a case, taxability of dividend shall be at concessional tax rate of 10% without providing for any deduction under the Income-tax Act.
Advance tax liability on dividend income:- If the case of shortfall in the advance tax instalment or the failure to pay the same on time is on account of dividend income, no interest under section 234C shall be charged if the assessee has paid full tax in subsequent advance tax instalments. However, this benefit shall not be available in respect of the deemed dividend as referred to in Section 2(22)(e).
Submission of Form 15G/15H:- A resident individual receiving dividends whose estimated annual income is below the exemption limit can submit form 15G to the company paying the dividend. Similarly, a senior citizen whose estimated annual tax payable is nil can submit Form 15H to the company paying the dividend.