Up to Assessment Year 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, subject to Section 115BBDA which provides for taxability of dividend in excess of Rs. 10 lakhs. However, in such cases, the domestic company is liable to pay a Dividend Distribution Tax (DDT) under section 115-O. The Finance Act, 2020 has abolished the DDT and moved to the classical system of taxation wherein dividends are taxed in the hands of the investors.
Thus, dividend received during the financial year 2020-21 and onwards shall now be taxable in the hands of shareholders/investors, irrespective of the amount received at applicable income tax slab rates.
As per section 194, the domestic companies are responsible to deduct Tax at Source (TDS) at 10%, if the aggregate amount of dividend distributed to resident shareholders crosses the amount of Rs. 5,000 in a financial year. The taxpayer can claim the credit of such TDS in their return of income.
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Taxability of Dividend Income
A person can deal in securities either as a trader or as an investor. The income earned by him from the trading activities is taxable under the head business income. Thus, if shares are held for trading purposes, then the dividend income shall be taxable under the head “Income from Business or Profession”. Whereas, if shares are held as an investment, then income arising in nature of dividend shall be taxable under the head “Income from other sources”.
Deductions from dividend income
Where dividend is taxable 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 interest on loan, collection charges etc.
Whereas if dividend is taxable under the head ‘Income from 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 realising such dividend.
Quarter-wise breakup of dividend income
In case a taxpayer has dividend income under the head ‘Income from Other sources’, taxpayers are required to give a quarter-wise breakup of dividend income received in a financial year. The breakup can be provided for the span of 1st April to 15th June, 16th June to 15th September, 16th September to 15th December, 16th December to 15th March and 16th March to 31st March.
Advance tax liability on dividend income
If the shortfall in the advance tax instalment or the failure to pay the same on time is on account of dividend income, no interest under section 234C shall be charged provided the assessee has paid full tax in subsequent advance tax instalments. However, this benefit shall not be available in respect of the deemed dividend as referred to in Section 2(22)(e).
Note: In this article, the discussion is focused only towards taxability of dividend income in case of resident shareholders.
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