All about dividend income, payment and compliances

Dividend income, payment and reporting has undergone major changes during the last and current financial year with increased taxation in the hands of the recipients and increased reporting requirements.

These days investment in shares and securities has become a favourite of most people and as a result many people have dividend income.

Also, a lot of the companies pay dividend therefore reporting and other compliances relating to dividend payments is important for them also.

Let’s go through some of the major changes when it comes to dividend.

1) Taxation of dividend in the hands of the shareholders

One of the major changes in the taxation of dividend is the increased taxation of Dividend income in the hands of the shareholders.

From FY 2020-21, Section 10(34) exempting dividend Income from taxation has been completely withdrawn.

Earlier Domestic companies were required to pay dividend distribution tax (DDT) on payment of dividend but DDT has been done away with from 01.04.2020. Thus, if the dividend is distributed on or after 01-04-2020, the domestic companies shall not be liable to pay DDT and the shareholders will be liable to pay tax on such dividend.

Also, section 115BBDA, providing taxability of dividend over Rs 10 lakhs has been done away with meaning thereby that entire dividend income received by a person is now taxable in the hands of the shareholder.

The above changes have increased the tax liability of dividend income for shareholders but companies don’t have to pay DDT on dividend distribution thereby reducing cost of dividends for them.

2) TDS on dividend payments

As per the Section 194, which shall be applicable to dividend distributed, declared or paid on or after 01-04-2020, an Indian company shall deduct tax at the rate of 10% from dividend distributed to 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 deducted on dividend income of LIC, GIC or any other insurer in respect of any shares owned by it or in which it has full beneficial interest.

Also, TDS on dividend paid or distributed to non-residents will be applicable as per section 195 of the IT Act and the Double Taxation Avoidance Agreement (DTAA) with the country of residence.

3) Taxability and tax rate for non-resident shareholders

A non-resident generally holds shares of an Indian company as an investment and therefore any income derived by way of dividend is taxable under the head other sources except where such income is attributable to Permanent Establishment (PE) of such non-resident in India.

The dividend income, in the hands of a non-resident (including FPIs and non-resident Indian citizens (NRIs) is taxable at the rate of 20% as per section 115A of the Act without providing for deduction under any provisions of the Income-tax Act. However, if there is a beneficial rate of dividend as per DTAA that rate can be applied subject to conditions given in the DTAA and furnishing TRC etc.

Where the dividend is received in respect of GDRs of an Indian Company or Public Sector Company (PSU) purchased in foreign currency, the tax shall be charged at the rate of 10%. Also, dividend income of an investment division of an offshore banking unit shall be taxable at the rate of 10%.

4) Deductions from dividend income

Where dividend is shown as business income, the taxpayer can claim the deductions of all those expenditures which have been incurred to earn the dividend income such as collection charges, interest on loan etc. Whereas if dividend is taxable under the head other sources, the taxpayer 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 realizing such dividend.

5) Reporting requirements on payments/distribution of dividends

 From FY 2020-21, the reporting requirements for a company paying dividends has also increased.

Any company which has paid/distributed/declared dividend during financial year 2020-21 and onwards needs to file information of such payment/distribution in Statement of financial Transactions.

This statement was due to be filed by 30th June’2021 for dividends paid during FY 20-21. Such statement needs to be filed for dividend payouts for subsequent financial years also.

The Govt. in its endeavor to make return filing process easy and ensuring pre-filled data in the IT Return has made it compulsory for companies to file information of such dividend payment.

The data filed through this SFT will be pre-filled in the ITR form of the persons receiving such dividend also the same will be available for viewing in annual information system (Form 26AS) of such person.

Dividend whether final or Interim paid or distributed is to be reported through SFT. Moreover, even deemed dividend under section 2(22)(e) must be reported in such statement of financial transactions.

There is no threshold limit for filing SFT for dividend. Therefore, Dividend payment of any amount must be reported through SFT.

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(The author is a Chartered Accountant and can be contacted at [email protected] or Mobile: +91-9953199493)