The dividend is basically a part of the profit of the company to distribute to the shareholders of the company. Moreover, as per section 10(34) of the Income Tax Act, income referred to in section 115-O of the Income-tax Act is exempt from the Income Tax as per section 10(34) of the Income Tax Act.
Definition of section 10(34):-
As per section 10(34) of the Income Tax Act, Dividend income is exempt from the Income act, referred to in section 115-O. Also, Income chargeable under section 115BBDA is untouched from section 10(34) that is, Income will be taxable as per the provision of the section 115BBDA of Income-tax act.
Overview:-
Section 115-O:-
It refers to any dividend distributed by the company (except Dividend mention under section 2(22)(e).
Dividend Distribution Tax
As per the tax scenario, Previously, the domestic company was required to pay Dividend Distribution Tax, and basically, to avoid double taxation, the exemption under section 10(34) is provided to all domestic incomes on which the dividend is paid by domestic companies only.
but in today’s scenario, as the Financial Budget 2020 is announced the Dividend Distribution Tax is abolished. The dividend income is taxable in the hands of recipients only.
This means that dividend received from an Indian company is exempted till 31 May 2020, as the company already paid Dividend Distribution Tax but from 1 April 2020, all dividend income will be taxable in the hands of investor only. Similarly, the tax of 10 percent on dividend receipts of resident individuals, HUF, firms in excess of 10 percent are also withdrawn
Section 115BBDAe
Provisions of this section come into picture when aggregate dividend income either as distributed or paid by the domestic company exceeds INR 10 Lakhs. Accordingly, Section 115BBDA levies 10% on the dividend income exceeding 10 lakhs.
Example
1. Mr. A received a dividend from the company of Rs. 18 lakh while investing Rs.1 crore amount.
In this case, Dividend income up to Rs. 10 lakhs will be exempt and income exceeding 10 lakh will be taxable under section 115bbda which levies 10 % i.e, (8,00,000*10%).
Wherein Company is given a full exemption to not to pay Dividend Distribution Tax.
2. Ram received an Rs.7.5 lakh dividend from the Indian Company and accordingly, Company paid no DDT tax. Now, what will be the implication of this dividend income received?
In this case, Sec10(34) will be applied wherein it will exempt the Dividend income of the Ram of Rs.7.5 lakhs as it is not exceeding Rs.10 lakh.
However, the government is a proposal for removing the Dividend Distribution Tax but the notification is not received yet.
Today’s Scenario
In today’s scenario companies has to deposit DDT within 14 days of declaration or payment of dividend
whichever is earlier. provided that, dividend from foreign companies is taxable in the hands of the investor.
The mutual fund companies also pay the dividend distribution tax, the rates are as follows;-
a)On debt-oriented funds, the DDT shall be 25 percent.
b)On equity-oriented funds, the DDT shall be 10 percent.
Earlier it was exempt but now it is taxable.
However, with some things the DDT can be reduced which is;-
1)Maximize your tax deduction and adjustments.
2)Reduce your taxable income.
3)Live in a state with no tax.
4)If all these fail, you can retire early and reduce the reduction that way.
Finance Act:-
The Finance Act 2020, also impose TDS on dividend distribution on companies and mutual fund on or after 1 April 2020. The normal rate of TDS is 10 percent on dividend paid by an Indian company or mutual fund company in excess of 5000 rupees
However, due to COVID-19 pandemic the government the TDS rate 7.5 percent from 10 percent.
For example, Mohit is the dividend income of rupees 6000 then, the company shall deduct 7.5 percent of received dividend income, and remaining shall be received by the investor which is Rs.5550 only.
A resident individual receiving dividends whose estimated annual income is below the exemption limit can submit form 15G to the company or mutual fund paying the dividend. Similarly, a senior citizen whose estimated annual tax payable is nil can submit Form 15H to the company paying the dividend.
The company or mutual fund informs the shareholder about the dividend declaration on their registered mail id and requires submission of form 15G or form 15H to claim dividend income without TDS.
If the takes the loan, the amount paid as interest on any monies borrowed to invest in the shares or mutual funds is allowable as a deduction. The interest deduction is limited to 20% of the gross dividend income received. However, any other expense such as commission or remuneration to a banker or any other person to realize such a dividend on behalf of the taxpayer is not allowable as a deduction.
Resident Shareholder
Individual: – For the individual shareholders, the dividend shall be taxable as per the applicable slab rates.
Towards this, a TDS will be deducted at 10% on dividends received above INR 5,000 in a year instead of INR 2, 500. Moreover, the government abolished an additional tax of 10% on dividend income in excess of Rs. 10 lakh per year for Resident non-corporate taxpayers but due to COVID-19 pandemic the TDS reduced to 7.5 percent.
Companies: – For the corporate shareholders, the dividend shall be taxable as per the effective tax rates, which would range from 25.17% to 34.94%.
Mutual Funds:- The insertion of section 194K under the Act in which Mutual Funds, on payment of dividend to residents, will be required to deduct TDS at the rate of 10%.
For Non-Resident Shareholder
Indian companies shall be liable to withhold taxes at 20% on payment of dividends to a non-resident shareholder. This rate could be lower if the benefit under the tax treaty is available to such shareholders. Tax treaties with Singapore, Mauritius, Netherlands, Australia, United Kingdom, and the USA provide for a lower withholding tax rate of 5% to 15%. Hence, nonresident shareholders can claim the benefit of lower tax rates under the respective treaties.
Conclusion:
Now, with the abolition of DDT, companies will be able to successfully distribute dividends within the group without incurring DDT costs. This will be particularly helpful to listed companies, which will be able to receive dividends from their joint venture/ subsidiary/ associate and distribute the same to the ultimate shareholder without incurring DDT cost.
Even in unlisted companies/ groups, dividends may be received from the joint venture/ subsidiary/ associate with a one-time tax cost, where the dividend is retained at the recipient company level.
This amendment will also be a positive move for foreign investors who do not currently receive the benefit of DDT tax credit in their home jurisdictions. Such foreign investors will now be able to avail credit of such taxes withheld, subject to the availability of the benefit of the tax treaty.
However, the relief of dividend income from foreign companies to Indian company is not available but the government is in due consideration to provide relief so the investor can invest freely without considering the cost so that our economy develop efficiently, speedily and globally.
Tax reduction doesn’t mean tax avoidance always.
Which company comes under MSME?