If you have invested in the Shares and earning the dividend Income from the domestic companies then this article will going to be really informative to you as there is some changes made by the Budget 2020 in respect of Taxing the Dividend Income received from Domestic Companies. In this article, we only discussed the taxation of dividends received from domestic companies by A RESIDENT SHAREHOLDER.

Position up to AY 2020-21 i.e. FY 2019-20

Up to AY 2020-21 i.e. FY 2019-20, Dividend Received from the Domestic Company was exempt in the hands of Shareholders due to the reason that on such dividend, companies has to pay Dividend Distribution Tax (DDT) under Section 115-O. As company already pay the tax on dividend distributed, hence it was tax free in the hands of shareholders under section 10(34).

However, Budget 2016 introduced a new section 115BBDA which start taxing the Dividend Income received from Domestic Companies @ 10% if aggregated of such dividends exceeds Rs. 10 Lac.

DDT

Hence, if an individual earning Dividend Income up to Rs 10 Lac in a financial year he was not liable to pay any tax on such dividend income but if earning more than that, then he shall be liable to be taxed in respect of such dividend income @10% irrespective of slab rate applicable to him irrespective of the Fact that DDT was also been paid by the company. Hence in such cases of high earnings from dividends government used to tax dividends twice.

Position From AY 2021-2022 i.e. FY 2020-21

In the Budget 2020 Finance Minister Smt. Nirmala Sitaraman abolished the Dividend Distribution Tax u/s 115-O and also shifts the Tax Liability on the entire Dividend income in the hands of Shareholder by withdrawing the exemption provided u/s 10(34).

W.e.f 01.04.2020 any Dividend Income earns by the investors shall be Taxed at the normal rate of tax applicable to them and Section 115BBDA which exempts up to Rs. 10 Lac also has no any relevance now as from 01.04.2020 entire dividend income shall be taxable.

Further, the companies paying dividends after 01.04.2020 shall deduct TDS u/s 194 @ 10% if such dividend income exceeds Rs. 5000/-

Deductions available in respect of Dividend Income:

Holding Shares as Stock-in-Trade:

 Dividend income shall be treated as Business Income and all the related expense to realize the dividends like interest, Commission etc. shall be allowed as deduction from the Dividend Income.

Holding Shares as Investment

Dividend Income Shall be treated as “Income from Other Sources’. Deduction only in respect of Interest expense on loan (if any) incurred to realize the dividend shall be allowed up to maximum Limit of 20% of Dividend Income (Proviso to section 57).

Basis of Charge of Dividend Income

Method of accounting as employed for the business income or Income from other sources 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

Comments:

1. By abolishing the DDT, government relaxed the financial burden and also compliance burden on the corporates as now they did not require paying DDT at all, while earlier they were required to pay DDT and more interestingly, neither any credit nor any deduction of such DDT was allowed to them.

2. Earlier government was in receipt of Tax on dividends at a flat rate of 15% by way of DDT (effective rate 17.65% after grossing up of dividend and 20.56% after adding surcharge and cess) but after this revised scenario, government will get the tax as per the normal tax rate applicable to the individual (From 5% to 30%).

3. Though the TDS shall be deducted @ 10% on the dividend income exceeding Rs. 5,000/-, however, if the slab rate applicable to the individual higher than 10% then he should take into consideration such dividend income while calculating the Advance Tax Liability.

Author Bio

Qualification: CA in Practice
Company: N G R & Associates
Location: FARIDABAD, Haryana, IN
Member Since: 10 May 2020 | Total Posts: 7
Nishant Singla is Fellow Member of Institute of Chartered Accountants of India (ICAI) M. No. 536056 . He has completed his Chartered Accountant Course in the Year 2014; he has also completed Certificate Course of Valuation of Shares conducted by ICAI in the year 2015 View Full Profile

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