Finance Act 2020 has made significant changes in the way dividend was taxed in India, up to the Financial year 2019-20 dividend was liable to be taxed at the time of distribution by the company u/s 115-O @ 20.56% (effective rate). Dividend income in the hands of the shareholders was exempt, except for resident individual shareholders who earned dividend income in excess of Rs 10 Lakhs who needs to pay tax @ 10% of dividend earned in excess of Rs 10 Lakhs u/s 115BBDA.

After the Finance Act 2020, Section 115-O and Section 115BBDA no longer be effective, and now dividend is taxed directly in the hand of the shareholders as per their respective Income Tax slab.

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The Tax rate applicable on Dividend Income is as under:-

Details Individuals Shareholder Corporate Shareholder
Tax rate As per their Income Tax slab rate. For HNI investor taxed at rates up to 42.74% Tax rate is between 25.17% to 34.94% ( Effective)
Maximum Tax from above 42.74% 34.94%

Taxation of Buy-back of Shares

As per Section 115QA, buy-back of shares is taxable in the hand of a company like DDT and effective tax rate on buy-back is 23.296% in case of a domestic unlisted company.

Buy-back tax has to be paid by the company on the distributed income which is the consideration paid by the company on buy back of shares, as reduced by the amount received by the company on the issue of such shares.

Further, Income received by the shareholder from such buyback is exempt from tax u/s 10(34). Hence, in case of buy-back of shares tax is only to be levied at the time of distribution as stated above and income in the hand of the shareholder is completely exempt from tax.

The effective rate on the dividend is between 34.94% to 42.74% as stated above and effective rate of tax in case of buy-back is only 23.296% now. Considering the above in the opinion of the author more and more companies will opt for buy-back options in the coming days instead of dividend payment option seeing the benefit in rate of tax.

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April 2021