Taxation of dividends on shares received from companies

by | Jan 9, 2021 | Articles

In the light of the Union Budget 2020

KORAH AND KORAH, CHARTERED ACCOUNTANTS

 

Up to FY 2019-20, what was the tax treatment of dividends on shares declared / distributed / paid by companies?
A. For Domestic Companies
  • All domestic companies were required to pay dividend distribution tax(DDT) at the rate of 15% (excluding cess and surcharge) on the dividends declared / distributed / paid under Section 115-O of the Income Tax Act,1961.
B. For Foreign Companies
  • Foreign companies were not required to pay DDT.
Up to FY 2019-20, what was the taxability of such dividends in the hands of a shareholder?
A. From Domestic Companies
  • As per Section 10(34), dividends on shares received from domestic companies were exempt in the hands of a shareholder (resident and non-resident).
  • However as per Section 115BBDA of the Income Tax Act, 1961, a resident individual was liable to pay tax at 10% if his total income included income by way of dividends declared / distributed / paid by Domestic Companies in excess of INR 10 Lakhs.
B. From Foreign Companies
  • If received by an individual shareholder, then normal income tax rates applied on such income.
  • If it was received by an Indian Company holding 26% or more equity share capital in the Foreign Company, then dividends were taxed at 15%(excluding cess and surcharge) in the hands of the Indian Company as per Section 115BBD.
What are the changes now as per Finance Act 2020?
A. For Domestic Companies
  • DDT has been abolishede. there is no requirement for domestic companies to pay DDT on dividends declared / distributed / paid to shareholders.
B. For Foreign Companies
  • No change e. foreign companies are still not required to pay DDT.
C. For Shareholders
  • Section 10(34) has been withdrawnand now the shareholders will be required to pay tax on such dividends received from domestic companies (like any other ordinary income) based on their Normal Income Tax Slabs.
  • Also, fromFY 2020-21 onwards, Section 115BBDA has been abolished and dividends received by resident shareholders will be taxed as per Normal Income Tax Slabs without any threshold exemption of INR 10 Lakhs.
  • There is no change as regards dividends from foreign companies i.e. shareholders will still continue to be liable to pay tax on dividends (as discussed above)
What are the amendments in the TDS provisions on dividend payments made by Companies?
    • Earlier, there was no requirementto deduct TDS on dividend payments made by Domestic Companies under Section 194 of the Income Tax Act, 1961 since the same was exempt in the hands of shareholders.
    • Now, this section has been amendedand accordingly, payment of dividends by Domestic Companies to resident recipients shall be liable for tax deduction at 10%.
    • A threshold limit of INR 5000has also been introduced i.e. the requirement to deduct tax at source is only if the aggregated payments made by a Company during a Financial Year exceeds INR 5000.
    • Dividend payments made to non-residents continue to be out of the purview of Section 194.
    • Also, there is no requirement to deduct TDS on dividend payments made by LIC, GIC and their wholly owned subsidiaries.