Under the current scenario up to  AY 2020-21, if a shareholder gets dividend from a domestic company then he shall not be liable to pay any tax on such dividend 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 @ 20.36%. The Finance Act, 2020 has eliminate the DDT and liability of tax shifted in the hands of investors. Therefore, the provision 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. Shareholders are liable to pay tax on such dividend income.

Expenses related to income from dividend is allowable as deduction from the income as per new regime.

Union Budget 2020

Taxability of Dividend in the hands of shareholders

Before FY 2020-2021 Dividend was one of the favorite income of the assessee because Section 10(34),which provides an exemption to the shareholders in respect of dividend income, but this exemption  is not applicable from Assessment Year 2021-20. Thus, 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 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 and tax rate depend on many factors like residential status of the shareholders, relevant head of income. In case of a nonresident shareholder, the provisions of Double Taxation Avoidance Agreements (DTAAs). etc

1. Taxable in the hands of resident shareholder

If shares are held by the assessee 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.

2. Deductions from dividend income

There are two ways where assessee can show his dividend income if 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 realizing such dividend.

3. Tax rate on dividend income

The dividend income shall be chargeable to tax at normal tax rates as applicable in case of an assessee.

Obligation of the domestic companies in respect of Dividend

 Tax liablity is shifted from companies to investors. The domestic companies shall not be liable to pay DDT on dividend distributed to shareholders on or after 01-04-2020 anymore. However, domestic companies shall be liable to deduct tax under Section 194. 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 the resident shareholders if the aggregate amount of dividend distributed or paid during the financial year to a shareholder exceeds Rs. 5,000.

Income tax return need to be filed by the assessee if taxable income cross the limit of basic slab rate

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Qualification: CA in Practice
Company: Neha J Garg & Co.
Location: New Delhi, New Delhi, IN
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2 Comments

  1. m m asrani says:

    Thx for the info,wanted to know at what rate is income tax to be paid if the divident amt crosses Rs 5000 in a financial year, also whether its to paid as advance tax & whether its 90% of the tax to be paid as advance tax.

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