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Tax Treatment for dividend received from domestic Company (with effect from FY 2020-21)

Updated: Feb 7

Share investors are very well aware that earlier i.e till Assessment Year 2020-21, dividend received from Domestic Company was exempt under section 10(34) in the hands of a receiver, however, Domestic Company has to pay Dividend Distribution Tax on dividend declared (Section 115-O).

Finance Act 2020 has abolished the Dividend Distribution Tax, and tax on dividends is now to be paid by the investor. Thus, domestic companies shall not be liable to pay any dividend distribution tax for dividends distributed on or after 01st April 2020 consequently investors will be liable to pay tax on dividend income.

In this article, we have discussed the tax treatment of Dividend received by a resident taxpayer

What is Dividend as per Income Tax?

As we normally understand, the dividend is a share of profit distributed by the company to the shareholders, besides this, as per section 2(22), the following shall also be considered as a dividend:

  1. Distribution of accumulated profits to shareholders entailing release of Company's Asset

  2. Distribution of debentures or deposit certificates to shareholders out of the accumulated profits of the company and issue of bonus shares to preference shareholders out of accumulated profits

  3. Distribution made to shareholders of the company on its liquidation out of accumulated profits.

  4. Distribution to shareholders out of accumulated profits on the reduction of capital by the company.

  5. Loan or advance made by a closely held company to its shareholder out of accumulated profits.

Taxability of Dividend Income

Earlier Dividend was exempt under section 10(34), but from AY 2021-22 i.e Financial Year 2020-21 onwards dividend is now taxable in the hands of the shareholder, thus section 10(34) is now withdrawn from FY 2020-21. Also, Section 115BBDA which provides for tax on dividends exceeding Rs.10 lakhs has no relevance as the entire dividend is now taxable.

The obligation of a Company on the distribution of Dividend: