10 MOST IMPORTANT POINTS TO KNOW ABOUT DIVIDEND INCOME
1. Till Assessment Year 2020-21, the dividend income from a domestic company was exempted in the hands of shareholders under section 10(34) of the Income Tax Act and the company was liable to pay Dividend Distribution Tax (DDT) under section 115-O.
However, the Finance Act, 2020 made the amendment that the dividend income shall be taxable in the hands of the shareholders and the burden of tax payment is shifted from the company to the shareholders and the company are no more liable to Pay DDT.
2. Due to this amendment, the entire amount of dividend income is taxable in the hands of the shareholders, the threshold limit of Rs. 10 Lakhs as given u/s 115BBDA has no effect.
3. Whether Taxable U/h PGBP or IFOS for a resident shareholder?
- Holds Share for Trading Purpose-Income from Business or Profession
- Holds Shares for Investment Purpose-Income from other sources
4. When dividend income shall be taxable?
Final dividend including deemed dividend u/s 2(22) shall be taxable in the year in which dividend is declared, distributed or paid whichever is earlier.
An interim dividend is chargeable to tax in the year in which it is received by the shareholder.
5. Deductions admissible from dividend income
- If dividend income is taxed u/h PGBP, the assessee is eligible to claim deduction towards all the expenditures incurred to earn such dividend income such as collection charges, interest on loan etc.
- If the dividend income is taxed u/h IFOS, the taxpayer can claim deduction only towards interest expenditure incurred to earn the dividend income. Further, deductions claimed cannot be more than 20% of dividend income.
6. Dividend income shall be chargeable to tax at the normal tax rates as applicable to an assessee.
7. The domestic companies shall be liable to deduct TDS at the time of payment under section 194 or 195 of the Income Tax Act, 1961 in the case of resident & non-resident shareholders respectively.
- Resident Individual (TDS u/s 194)- at the rate of 10% from dividend distributed if the amount of dividend to such shareholder in aggregate in that year is more than Rs. 5,000.
- Other Residents (TDS u/s 194) mandatory to be deducted irrespective of the amount
If PAN of the resident shareholder is not available or TDS on dividend in case of non-filers under section 206AB of ITR: TDS shall be deducted by the domestic company at the rate of 20%.
Further, no TDS shall be deducted in the following cases also:
(a) Form 15G/15H is furnished by the shareholder to the company
(b) Certificate of lower/nil TDS u/s 197 is furnished by the shareholder to the company
8. Dividend payment to non - resident shareholders u/s 195 is subject to withholding tax at the rate of 20% increased by surcharge and health and education cess of 4%. A lower rate for tax may apply if the benefit of the tax treaty /DTAA is available to shareholders.
9. TDS @20% on dividend paid to Foreign Institutional Investors or Foreign Portfolio Investors u/s 196C/196D of the Income-tax Act.
10. Section 80M applies to domestic companies that have declared dividends and are also in receipt of the dividend from another domestic company.
The deduction available to domestic companies can be summarized as follows:
- Amount of dividend received from domestic companies; or,
- Amount of dividend distributed one month prior to the due date of filing return;
whichever is lesser.
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