In Dividend income, payment and reporting there has been big and important changes occurred during the last and current financial year with increased taxation in the hands of the recipients and increased reporting requirements.
Nowadays investment in shares and securities has become a favorite of most people and as a result many people have dividend income.
Let’s go through some of the major changes in dividend.
1) Taxation of dividend in the shareholder’s hands
One of the big changes in the taxation of dividend is the dividend income’s increased taxation in the hands of shareholder.
From financial year 2020-21, Section 10(34) exempting dividend Income from taxation has been completely withdrawn.
Earlier Domestic companies were needed to pay dividend distribution tax (DDT) on payment of dividend but dividend distribution tax has been done away with from 01 April 2020. Hence if the dividend is distributed on or after 01 April 2020, the domestic companies will not be liable to pay DDT and the shareholders will be liable to pay tax on such dividend.
Also, section 115BBDA, providing taxability of dividend over INR 10 lacs has been done away with meaning thereby that entire dividend income received by a person is now taxable in the hands of the shareholder.
The above changes have increased the tax liability of dividend income for shareholders but companies don’t have to pay dividend distribution tax on dividend distribution thereby reducing cost of dividends for them.
2) TDS on dividend payments
According to the Section 194, which will be applicable to dividend distributed, declared or paid on or after 01 April 2020, an Indian company will deduct tax @ 10% from dividend paid to resident shareholders if the aggregate amount of dividend paid during the FY to a shareholder exceeds INR 5000.
However, no TDS will be deducted on dividend income of LIC, General Insurance Corporation of India or any other insurer in respect of any shares owned by it or in which it has full beneficial interest.
Also, TDS on dividend paid or distributed to non-residents will be applicable according to the section 195 of the income tax act and the Double Taxation Avoidance Agreement (DTAA) with the country of residence.
3) Taxability & tax rate for non-resident shareholders
A non-resident generally holds Indian company’s share as an investment and thus any income derived by way of dividend is taxable under the head other sources except where such income is attributable to PE of such non-resident in India.
The dividend income, in the hands of a non-resident (including FPIs and NRIs) is taxable @ 20% as per the income tax Act- section 115A without providing for deduction under any provisions of the income tax Act. However, if there is a beneficial rate of dividend as per the Double Taxation Avoidance Agreement rate can be applied subject to conditions given in the DTAA and furnishing Tax Residency Certificate etc.
Where the dividend is received in respect of GDRs of an Indian Company or PSU purchased in foreign currency, the tax will be charged @ 10%. Dividend income of an investment division of an offshore banking unit will be taxable @ 10% too.
4) Deductions from Dividend Income
Where dividend is shown as business income, the taxpayer can claim the deductions of all those expenditures which have been incurred to earn the dividend income like collection charges, interest on loan and many more. Whereas if dividend is taxable under the head of other sources, the taxpayer can claim deduction of only interest expenditure which has been incurred to earn that dividend income to the range of 20% of total dividend income.
No deduction will be allowed for any other expenses including commission or remuneration paid to a banker or any other person for the purpose of realizing this kind of dividend.
5) Reporting Requirements on Payments/Distribution of Dividends
From Financial year 2020-21, the reporting requirements for a company paying dividends has increased too.
Any company which has paid/distributed/declared dividend during FY 2020-21 and onwards require to file information of such payment in financial Transaction’s statement.
This statement was due to be filed by 30-06-2021 for dividends paid during financial year 20-21. Such statement should be filed for dividend payouts for subsequent financial years too.
The Government in their try to make return filing process easy and ensuring pre-filled data in the ITR has made it mandatory for companies to file information of such dividend payment.
The data filed by this SFT will be pre-filled in the person’s ITR form receiving such dividend also the same will be available for viewing in annual information system (Form 26AS) of such person.
Dividend whether it is final or interim paid or distributed is to be reported by statement of financial transaction. Moreover, even deemed dividend u/s 2(22) (e) should be reported in such financial transaction’s statement.
There is no threshold limit for filing statement of financial transaction for dividend. Thus, any amount’s dividend payment must be reported through SFT.