Tax on Dividend Income

Is there any Income tax on dividend income in India? Do I have to pay tax on dividend income? what is tax rate for dividend income? How much is the surcharge on dividend income? All are answered here.

Dividend is the part of profits or accumulated profits of the company which it shares with its shareholders as a reward for their contribution to the company. The dividend would be decided by the board of directors and then would be subjected to the approval of shareholders in the Annual general meeting (AGM).

Till the Financial year 2019-20 (i.e, up to 31st March 2020), the dividend received by the shareholders were exempted (except in certain cases as given in point 4 below) as the company was paying dividend distribution tax upon declaring the dividend. However, in Budget 2020 which is applicable from the Financial year 2020-21, the dividend has been made taxable in the hands of the shareholders at their respective income tax slab rates.

Thus, as a consequence of the Finance Act 2020,

  1. The companies need not pay dividend distribution tax for paying the dividend from 1st April 2020 i.e, section 115-O dealing with dividend distribution tax has been removed.
  2. The companies paying a dividend have to deduct TDS under section 194 at 10% of the dividend income. Therefore, the same would appear in the Form 26AS of the shareholder. However, if the dividend is paid to an individual in electronic mode and the amount of dividend is up to Rs.5000 the company need not deduct TDS.
  3. The dividend would be included under the head of “Income from other sources” in the shareholder’s return. (it was shown under exempt income till 31st March 2020).
  4. Section 115BBDA has been removed. The section stated that dividend income received by certain persons in excess of Rs.10,00,000 (i.e, less than Rs.10,00,000was exempt) shall be taxable at the rate of 10%. Since, from 1st April 2020, the entire dividend shall be taxable in the hands of the shareholders this section will not hold good.
  5. Section 80M has been re-introduced.

 Section 80M deals with the deduction for an inter-corporate dividend.

Let us understand this section with the help of the following example,

Say, ABC & Co is a holding company and PQR & Co is the subsidiary company. Now, PQR & Co has paid a dividend of Rs.10,00,000 to ABC & Co. on 1st June 2020. So, this dividend income received by ABC & Co shall be included in their total income and they are liable to pay tax on the same. On 1st August 2020, ABC & Co paid a dividend of Rs.10,00,000 to its shareholders. This dividend would be taxed in the hands of shareholders. Here, the amount of Rs.10,00,000 is getting taxed twice i.e, once in the hands of ABC & Co and then in the hands of shareholders.

Therefore, to remove this double taxation section 80M was re-introduced. As per section 80M, if a domestic company is receiving a dividend from any other domestic company or foreign company or business trust, such dividend shall be first included under “Income from other sources” and then a deduction under Chapter VI A under section 80M can be availed at lower of the following:

  • Dividend received during the current year
  • Dividend distributed one month before the due date of filing the return of income

Accordingly, the cascading effect has been eliminated.

Now, what if a company has declared a dividend in Financial Year 2019-20 but the same is received in the Financial Year 2020-21. Should the shareholders pay tax on such dividend income? The answer is NO. This is because the company would have already paid dividend distribution tax upon declaring the dividend. So, the shareholders need not pay tax again and the same shall be exempt in their hands subject to section 115BBDA.

Further, dividend income shall not attract an enhanced surcharge rate of 25% and 37%. The rate of 25% surcharge is applicable when the total income is more than 2 crores and up to 5 crores and 37% is applicable when the total income is more than 5 crores. Therefore, the maximum surcharge rate on dividend income shall be 15% even when the said income is more than 2 crores.

Hope this article has helped in getting an insight into dividend taxation.

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About Apoorva D V

Apoorva D V
CA Apoorva is a qualified Chartered Accountant, based out of Bangalore. She has experience in the field of Taxation, Company Law matters.

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Ravindra Poojary
Ravindra Poojary
20 days ago

Nice Article and Well Written CA Apoorva

Mahesh
Mahesh
20 days ago

Kindly clarify following
1. Will all dividends with or without TDS be captured in 26AS or only those where TDS is deducted will be captured.
If all are captured, one need not keep a track and ITR filing becomes easy
2. In example where it is said 10,00,000, does it mean rule is applicable when amout is equal to 10,00,000 or more.
Thanks

SARANYA METHAVI
SARANYA METHAVI
20 days ago

Beautifully depicted the entire theory about tax on dividend income by CA Apoorva. This article is easy to comprehend. The examples given add on to the precision.

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