TAXATION OF DIVIDEND INCOME
TAXATION OF DIVIDEND INCOME
1.1. TAXATION OF DIVIDEND INCOME WITH EFFECT FROM AY 2021-22
a. Dividend from Domestic Company
Dividend declared by a domestic company on or after April 1, 2020 (i.e., assessment year 2021-22) is taxable in the hands of all the recipients of the dividend income irrespective of the status of the assessee (subject to exemption from income-tax otherwise available under any provisions of the Income-tax Act, 1961 (‘the Act’)). The dividend income is chargeable to tax under the head ‘Income from Other Source’ u/s. 56 of the Act at the rate of taxation applicable to the assessee.
b. Dividend from Foreign Company
Dividend income received from a foreign company is also taxable in the hands of all the Indian resident shareholders irrespective of their status (subject to exemption from income-tax otherwise available under any provisions of the Act). The dividend income is chargeable to tax under the head ‘Income from Other Source’ u/s. 56 of the Act at the rate of tax applicable to the said assessee. However, in case where dividend1 is received by an Indian company from a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital of the company, such dividend shall be taxable in the hands of the Indian company u/s. 115BBD at a flat rate of 15% as increased by applicable surcharge and cess. No deduction in respect of any expenditure or allowance shall be allowed to the Indian company under any provisions of the Act in computing such dividend income.
Further, the Finance Act, 2022 has amended the aforesaid section 115BBD by inserting a sub-section thereto providing that the section shall not apply to assessment years beginning on or after April 1, 2023 (i.e., AY 2023-24 and thereafter).
c. Income in respect of units of Mutual Funds (for brevity referred as “dividend ”)
With effect from AY 2021-22, dividend received from Mutual Funds shall be taxable in the hands of all the recipients (subject to exemption from income-tax otherwise available under any provisions of the Act) under the head 'Income from Other Source' u/s. 56 of the Act at the rate of tax applicable to the said assessee.
1.2. DEDUCTION OF EXPENSES AGAINST DIVIDEND INCOME IN THE HANDS OF THE ASSESSEE
Section 57(i) grants deduction of any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising taxable dividend on behalf of the assessee.
Further, under clause (iii) of section 57, deduction is allowable also for any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning the income.
However, w.e.f. FY 2020-21, Finance Act, 2020 has inserted a proviso to section 57 (i) restricting deduction in respect interest expenses from dividend income to the extent of 20% of such dividend income, included in the total income for the year, without deduction under this section. Further, deduction shall not be permissible for any other expense that an assessee may incur wholly and exclusively for earning dividend income.
1.3. DEDUCTION IN RESPECT OF CERTAIN INTER- CORPORATE DIVIDENDS
Under section 80M, 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 then, while 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 one month prior to the due date of furnishing of the return of income u/s 139(1) shall be allowed.
Hence, to the extent provided in section 80M, the cascading effect of tax on dividend is eliminated.
It is also noteworthy that the benefit of section 80M would not be available for dividend received from a person other than companies and business trust, such as mutual funds.
1.4. GENERAL RATE OF TAX ON DIVIDEND
In case of resident assessees, the Act does not provide for any special rate of tax for dividend (except in certain cases as mentioned below) and therefore, in case of residents, dividend shall be taxable at the rate applicable to the assessee depending upon its status and/or income. In case of non-residents, the Act provides for a special rate of 20%, plus applicable surcharge and education cess. The following table tabulates the rate of tax applicable in case of dividend income.
Section | Assessee | Rate of tax |
|---|---|---|
General rates of tax as provided in the Finance Act | Resident shareholders | Applicable rate |
Section 115A | Non-resident or a foreign company | 20%* |
Section 115AC | Dividend income of Non- resident from Global Depository Receipts | 10%* |
Section 115ACA | Dividend income from Global Depository Receipts received by a resident individual, who is an employee of an Indian company engaged in specified knowledge based industry or service or its subsidiary | 10%* |
Section 115AD | FII Specified Fund | 20%* 10%* |
Section 115E | Non-resident Indians, being an individual who is a citizen of India or a person of Indian origin and who is not a resident. | 20%* |
*Rate under relevant DTAA (as modified by Multilateral Instrument (if applicable)), whichever is lower | ||
Withholding tax rates in case of dividend are tabulated as under:
Section | Assessee | Rate of tax |
Section 194 | Resident shareholders except in following cases:
| 10%# |
Section 196C | Dividend income of Non-resident from Global Depository Receipts | 10% |
Section 196D | FII Specified Fund | 20% 10% |
Section 195 | Non-resident person other than company Foreign company | 30%* 40%* |
#In absence of PAN, rate would be 20% *Rate under relevant DTAA (as modified by Multilateral Instrument (if applicable)), whichever is lower | ||
Comments