Tax planning with respect to Dividends for Assessment Years 2020-2021, 2021-2022 and Assessment Year 2022-2013.

I hereby try to give a simplified version of Tax planning with respect to Dividends for the Assessment Years 2020-2021, 2021-2022 and Assessment Year 2022-2013.

I. Assessment Year 2020-2021.

You have to understand the following provisions to plan your dividend decisions.

A. Definition of Dividend (sec 2(22))

The following distributions or payments by a company to its shareholders are deemed as dividends to the extent of accumulated profits of the company:

(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.

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.

B. Taxability.

a Dividend income becomes taxable in the previous year in which it is so declared, distributed or paid as the case may be.

b. Interim Dividend is deemed to be income of the previous year in which it is so distributed or paid.

c. Dividend paid by an Indian company outside India shall be deemed to accrue or arise in India.

C.  Income Tax by Company on dividend

Sec 115-0 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”.

D. Dividends Received is an exempted Income in the hands of customer as follows

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, he will be liable to tax as follows:

[email protected] 10% on exceeding ten Lakh Rupees plus surcharge

ii. Plus health &education [email protected]%

E. Bonus shares

By issuing bonus shares to equity shareholders, Companies can avoid the tax u/s 115-O on dividend distributed.

When redeemable preference shares are issued as bonus share ,on their redemption ,the amount shall be taxed as dividend distributed

Where bonus shares are issued to the preference shareholders, on their issue it is deemed to be dividend and liable to tax when a shareholder sells the bonus shares, the cost of bonus shares is taken as nil.

F. INTER-CORPORATE DIVIDEND

When a domestic Company receives dividend (Including deemed dividend) from another company (except a closely –held Company) it is exempt u/s 10(34).

G. Tax planning through issue of Bonus Debentures instead of Bonus Shares

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.

II. Assessment Year 2021-2022 and Assessment Year 2022-2023

A. 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. Deduction u/s 57 can be claimed maximum up to 20% of such dividend.

B. New Section 80M to introduced.

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.

C. 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%.

D.Inter-Corporate Dividend

Taxable subject to sec 80 M

E. Special Provisions relating to tax on distributed income of Domestic Company from Buy -Back of Shares

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.

F. Tax planning through issue of Bonus Debentures instead of Bonus Shares

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.

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One Comment

  1. rugram says:

    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.

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