Taxation of Dividends -In The Hands of Shareholders

We know that before Finance Act, 2020 a dividend received from a domestic company is exempt in the hands of shareholders. Because company declaring dividend is required to pay Dividend Distribution Tax (DDT) under provisions of Section 115O of the Income Tax Act,1961 before crediting amount of dividend into account of shareholders. Many business houses are raising concern on payment of DDT and have requested with the government to remove payment of DDT to create a smooth and good environment for investing and flow of FDI into India.

The Government through Finance Act, 2020 has removed provisions of payment of DDT and new dividend received by a shareholders ,whether from a domestic or foreign company will be taxable in his/her hands.

WE KNOW THAT THERE ARE TWO TYPES OF DIVIDENDS;

1) Interim Dividend-declared by Board of Directors of the company during the financial year under consideration. The Interim Dividend is distributed in the previous year in which its is declared ,suppose a company X Ltd., has declared Interim Dividend in FY 2020-21, then it shall be taxable in the same FY 2020-21.

2) Final Dividend- approved by shareholders of the company on recommendation of Board of Directors at the AGM of the company. The Final Dividend is generally declared in the year next to financial year to which it relates ,suppose in the AGM of X Ltd., final dividend has declared for FY 2020-21 but AGM held in FY 2021-22. In this case also dividend income will be taxable in the hand of shareholders in FY 2020-21. It means the dividend income will be taxable on the basis of accrual during the FY 2020-21.

DIVIDEND INCOME WILL BE TAXABLE UNDER HEAD -INCOME FROM OTHER SOURCES;- SECTION 56

Since there is no other head in which dividend income will be added to arise taxability of a person and hence it is taxable under residuary head of “Income From Other Sources”, Section 56 of the Income Tax Act,1961.

SECTION 57: provides that no expenses shall be allowed to be deducted from dividend income ,except interest on loan taken to invest into shares of the company and same has been capped to @20% of dividend income received. It means that deduction will be allowed only to the extent of interest expenses or 20% of the dividend income received  by shareholder.

Lets’ consider an example : Suppose Mr. X is a shareholder of X Ltd., and has received dividend income from X Ltd., to the extent Rs. 2,50,,000/- during FY 2020-21. He has taken a loan of    Rs. 5,00,000/- for investment in shares of X Ltd.,@12% p.a. Now in this case total interest payable by him during the year is of Rs. 60,000/- .

The deduction allowed him from dividend income shall be calculated as follows ;

i) Lower of two Rs. 60,000/- or Rs. 50,000/-( @20% of Rs. 2,50,000/- dividend received ) that is Rs. 50,000/-.

ii) Net dividend taxability in the hand of Mr. X ,Rs. 2,00,000/-( Rs. 2,50,000-Rs. 50,000).

PROVISIONS RELATED TO INTER CORPORATE DIVIDENDS- SECTION 80M ;

Section 80M provides that – 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 a 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.

(2) Where any deduction, in respect of the amount of dividend distributed by the domestic company, has been allowed under sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other previous year.

Explanation.—For the purposes of this section, the expression “due date” means the date one month prior to the date for furnishing the return of income under sub-section (1) of section 139.]

ANALYSIS OF SECTION 80 M; from above we find that

i) The divine receiving company should be an Indian  Domestic Company;

ii) The  dividend paying company can Be a Indian Domestic Company or a Foreign Company or a business trust; and

iii) The Domestic Company must distribute dividend before one month of due date of filing of returns under provisions of Section 139(1) of the Income Tax Act,1961.

LET’S CONSIDER AN EXAMPLE;

Suppose X Ltd., is a shareholder of Y Ltd., and has received Rs. 1,50,000/- dividend from Y Ltd., during FY 2020-21. X Ltd., has also declared dividend to its shareholders to the tune of Rs. 2,00,000/- . Now provisions of Section 80M come into play ,X Ltd., can claim deduction to the tune of Rs. 1,50,000/- and liable to deduct TDS on Rs. 50,000/- only.

NOTE: to claim deduction under Section 80M of the Income Tax Act,1961, X ltd., has to distribute dividend before one month of due date of filing of returns under Section 139 (1) of the Act, 1961.

NEWLY INTRODUCED TDS PROVISIONS  UNDER THE INCOME TAX ACT,1961-SECTION 194

Section 194 provides the following-The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment [by any mode] in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax [at the rate of ten per cent] :

Provided that no such deduction shall be made in the case of a shareholder, being an individual, if—

(a)  the dividend is paid by the company by [any mode other than cash]; and

(b)  the amount of such dividend or, as the case may be, the aggregate of the amounts of such dividend distributed or paid or likely to be distributed or paid during the financial year by the company to the shareholder, does not exceed [five thousand] rupees:

Provided further that the provisions of this section shall not apply to such income credited or paid to—

(a)  the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), in respect of any shares owned by it or in which it has full beneficial interest;

(b)  the General Insurance Corporation of India (hereafter in this proviso referred to as the Corporation) or to any of the four companies (hereafter in this proviso referred to as such company), formed by virtue of the schemes framed under sub-section (1) of section 16 of the General Insurance Business (Nationalisation) Act, 1972 (57 of 1972), in respect of any shares owned by the Corporation or such company or in which the Corporation or such company has full beneficial interest;

(c)  any other insurer in respect of any shares owned by it or in which it has full beneficial interest.

LET’S ANALYSE ABOVE PROVISIONS ;

A Domestic Company declaring dividend has to do ;

i) Deduct TDS @10% on dividend paid to resident shareholder;

ii) No TDS will be deducted if payment is made through any other mode than Cash or aggregate amount of dividend paid or to be paid does not exceed Rs. 5,000/- and

iii) No TDS will be deducted if payment is made to LIC/GIC / Any other insurer where it has full beneficial interest in shares.

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DISCLAIMER: The above article is for information purpose only. The article has been prepared on the basis of available information and details at the time of preparation. Author will not be responsible for any loss or damage of any type  to any reader of this article arise due to any action by them on the basis of this article. It is firmly advised to the readers should take professional advise before taking any decision based on this article.