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

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i.e Financial Year 2020-21 onwards dividend is now taxable in the hands of the shareholder, thus section 10(34) is now withdrawn from FY 2020-21.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:

A domestic company is not liable to pay any Dividend Distribution Tax on dividend distributed on or after 01st April 2020, however, a dividend recipient i.e. shareholder has to pay tax on dividend income.

TDS on Dividend Income

Just like TDS deducted on Fixed Deposit Interest from the bank, as per section 194, a domestic company shall deduct tax on dividends distributed, declared, or paid on or after 01st April 2020. A TDS shall be deducted at the rate of 10% if the aggregate dividend payment to a shareholder exceeds Rs.5,000/- in a year.

Dividend Income is taxable under which head?

A person gets dividends on shares held by him whether it's for trading purposes or investment purposes. Tax treatment of dividend varies in both the case.

Dividend from Shares held for trading purpose

Income derived from share trading is treated as business income. Thus, dividend received from such shares which are held for trading purpose, then such dividend income shall be taxable under the head business or profession.

Dividend from Shares held for investment purpose

If shares are held for investment purposes, then dividend received on such shares is taxable under the head other sources.

Deductions allowed from dividend income:

  1. When a dividend is treated as business income, a taxpayer can claim expenses incurred to earn that dividend such as Commission, interest on loan, collection charges, etc.

  2. Whereas the assessee can claim just interest expenses paid to earn that dividend to the extent of 20 percent of the total dividends earned if the dividend is taxed under the head of other sources. Any additional expenditures, including commission or remuneration given to a banker or to any other person for the purposes of the dividend, shall not be deducted.

Tax Rate for Dividend Income:

Dividend income is charged at normal tax rates as applicable to taxpayers, however, in case of a resident individual, who is an employee of an Indian company or its subsidiary engaged in information technology, entertainment, pharmaceutical, or biotechnology industry and receives a dividend in respect of GDRs (purchased in foreign money) issued by such company under an Employees' Stock Option Scheme, dividend income is taxed at a 10% concessional tax rate without any deduction under the Income-tax Act.

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