“Navigate tax planning for dividends in Assessment Years 2021-2027. Understand key provisions, definitions, tax rates, TDS, and recent amendments for informed financial decisions.”
Tax planning with respect to dividends for the Assessment Years 2021-2022 to 2026-2027
I hereby present a simplified version of tax planning with respect to dividends for the Assessment Years 2020-2021 to 2026-2027.
Assessment Years 2021-2022 to 2026-2027
You have to understand the following provisions to plan your dividend decisions.
Definition of Dividend (sec 2(22))
Dividend includes:—
(a) Any distribution which entails the release of all or any part of the assets of the company;
(b) Any distribution of debentures, debenture-stock, or deposit certificates and any distribution to its preference shareholders of shares by way of bonus;
(c) Any distribution made to the shareholders on its liquidation;
(d) Any distribution on the reduction of its capital
(e) Any payment by a closely –held company by way of advance or Loan to a shareholder (being a person who is the beneficial owner of shares) having at least 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 income of the concern.
(f) Amount received on buy-back of shares by a domestic company-Section 2(22) (f)
As per Section 2(22) (f), any amount received on the buy-back of shares by the company before 01/10/2024 will be taxed in the hands of the company and is exempt in the hands of the shareholder.
Such amount received on or after 01/10/2024 will be deemed dividend and will be taxed in the hands of the shareholders at applicable slab rates.
Advances /loans received by HUF from a closely-held company is taxable as deemed dividend u/s 2(22) (e) if Karta, who is shareholder in lending company has substantial interest in the HUF even if HUF is not a registered shareholder. If a person takes trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word ‘advance’ in Sec 2(22) (e) of the Act. Hence, not liable to tax.
Income Tax by Company on dividend
Sec 115-O of Income Tax Act 1961—- .Notwithstanding anything contained in any other provisions of this Act and subject to the provisions of this section, in addition to the income -tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise ) on or after the 1 st day of April 2003 but on or before the 31st day of March,2020) , whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits )at the rate of 15%.
Provided that in respect of dividend referred to in sub-clause (e) of clause (22) of section 2, this subsection shall have effects as if for the words “fifteen per cent “, the words “thirty percent had been substituted”.
Now no Dividend Distribution Tax is to be paid by the company.
Tax on Distributed Income to unit holders –Sec 115 R.
Now the company has no liability to pay income tax on distributed income.
Dividends Received is an exempted Income in the hands of customer as follows (up-to 31/03/2020 only).
Sec 115 BBDA of Income Tax Act 1961.
If a person resident in India, receives dividends in aggregate exceeding ten lakh rupees from a domestic company or companies on or before 31st day of March 2020 he will be liable to tax as follows:
i.@ 10% on exceeding ten Lakh Rupees plus surcharge
ii. Plus health &education cess@4%
Tax planning through issue of Bonus Debentures instead of Bonus Shares (From the point of view of company)
Following are the important points you have to understand in that connection
i. The interest on debentures is deductible in computing Income
ii. A company can issue Bonus debentures if it wants to distribute deferred dividend.
No Dividend Distribution Tax [Amendment to sections 115O, 115R, 10(34), 10(35) etc.]
It has been decided to remove the concept of Dividend Distribution Tax u/s 115-O (from Companies) and 115R (From Mutual Funds etc ). The amendment is applicable to dividend received after 01/04/2020.Now dividend is taxable in the hands of recipients. Dividend is not exempt in the hands of recipient u/s 10(34) and 10(35). Dividend taxable in the hands of the recipient as per their regular income, without any exemption ceiling. The previous ceiling was Rs.10 Lakhs. Whereas if dividend is taxable under the head other sources, the assesse 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 to the Shareholders
The dividend income shall be chargeable to tax rat normal tax rates as applicable in case of an assesse except certain cases. In case of a non-resident shareholder, the provisions of Double Taxation Avoidance Agreements (DTAAs) and Multilateral Instrument (MLI) shall also come into play.
New Section 80M.
Where the gross total income of a domestic company in any previous year includes any income by way of dividends from any other domestic company or a foreign company or business trust, there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of such domestic company, a deduction of an amount equal to so ,much of the amount of income by way of dividends received from such other domestic company or foreign company or business trust as does not exceed the amount of dividend distributed by it on or before the due date.
TDS u/s 194
- TDS u/s 194 to be deducted by companies on dividend exceeding the limit of Rs 5000 per payee. The TDS is to be deducted from the amount of such dividend, income-tax at the rate of 10%.
- Assessment year 2026-2027: In section 194 of the Income-tax Act, in the first proviso, in clause (b), for the words “five thousand rupees”, the words “ten thousand rupees” shall be substituted.
Inter-Corporate Dividend
- Taxable subject to sec 80 M
Special Provisions relating to tax on distributed income of Domestic Company from Buy -Back of Shares under Sec 115 QA
- Notwithstanding anything contained in any other provisions of this Act, in addition to the income-tax chargeable in respect of the total income of a domestic company for any assessment year, any amount of distributed income by the company on buy-back of shares from a shareholder shall be charged to tax and such company shall be liable to pay additional income tax at the rate of 20% on the distributed income.
- Distributed Income means the consideration paid by the company in buy-back of shares as reduced by the amount, which was received by the company for issue of such shares, determined in the manner as may be prescribed.
- As per the amendment in Budget 2024, tax on any buyback made after 01/10/2024 will not be applicable in the hands of the Company.
Special provisions with respect to customers in the case of Buy -Back of Shares under Sec 10(34A)
- Any income arising to an assesse, being a shareholder, on account of buy-back of shares by the company as referred to in section 115 QA-Exempted Income.
- Assessment Year 2024-2025
In addition to the provisions mentioned above, the following amendment has been introduced for the Assessment Year 2024-2025:
After clause (34A), the following clause shall be inserted, effective from April 1, 2024:
‘(34B) Any income of a Unit of an International Financial Services Centre (IFSC), primarily engaged in the business of leasing aircraft, received by way of dividends from a company that is also a Unit of an IFSC primarily engaged in the business of leasing aircraft.
Explanation: For the purposes of this clause, “International Financial Services Centre” shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005.’
- As per the amendment in Budget 2024, it is not exempted in the hands of the shareholders. (After 01/10/2024).
Withdrawal of concessional rate of taxation on dividend income under section 115 BBD w.e.f 01/04/2023.
Author Bio
When a company issues bonus debentures whose value is more than Rs 5,000/-, how would the company deduct tax at source @10% from the deemed dividend? I request the author to clarify this. Thank you.