Finance Act 2020 has made important amendments to the taxation of dividends. With these amendments the general concept that dividends are exempt is no longer the same.
First, we will understand the two types of dividends:
Interim Dividend – It refers to the amount paid by the company to their shareholders as dividend during the year.
Final Dividend – It refers that for the give financial year the amount paid is the ultimate amount in the terms of dividend.
Section 8 endows for the taxability of the dividends. Only in the year of receipt Interim dividends are taxable which means it will be taxable in the year in which they are made available to the shareholders. However as far as final dividends are concerned, their tax liability arises as soon as they’re paid.
Now the question is in which head of income dividends will be taxable. Here Section 56 comes and provides that dividends will be taxable under the head IFOS i.e. Income from Other Sources. (It is essential to understand that dividends shall be taxable under IFOS even if the same are received by a dealer in shares.) Further Section 57 provision provides that no deduction will be allowed from the said dividend income towards any expenditure other than the expenses towards payment of Interest, which too is capped at 20; of the said dividend income. It means that the shareholder is liable to claim LOWER OF the following as expenditure against the dividend income-
- Actual Interest Paid OR
- 20% of the said dividend income.
Moving forward we will now discuss the deduction under Section 80M which is available to companies against certain Inter corporate dividends received. Section 80M provides that – Where the domestic company’s gross total income in any PY includes any income by way of dividends from any other domestic company / foreign company / business trust, there will, according to and subject to the provisions of this section, be allowed in calculating the total income of such domestic company, a deduction of an amount equal to so much of the income amount by way of dividends received from such other domestic company / foreign company /business trust as doesn’t exceed the amount of dividend paid by it on or before the due date.
(2) Where any deduction, related to the amount of dividend distributed by the domestic company, has been allowed under sub-section (1) in any previous year, no deduction shall be allowed in respect of such amount in any other PY.
Explanation- Due Date means the date one month prior to the date for furnishing the return of income under the section 139- sub-section (1)
We shall try to analyze the section step by step-
Dividend receiving company must be a domestic company.
Dividend paying company can be a domestic company /a business trust or foreign company.
Say for example that company X is a shareholder of company Y. Company Y distributes dividend to its shareholders. The share of dividend of company X comes to INR 1 lac. Now company X distributes INR 2 lacs dividend to their shareholders. Owing to section 80M, Company X can claim deduction of amount of INR 1 lac and shall be liable to deduct TDS only on the net INR 1 Lac provided that company X pays the said dividend 1 month prior to the due date under section 139(1).
Finally we now reach at the provisions of TDS on payment of dividends governed by Section 194.
Section 194 provides-
The Indian company’s principal officer or a company which has made the prescribed arrangements within India for the declaration and payment of dividends (including dividends on preference shares), shall, before making any payment via any mode in respect of any dividend or before making any distribution to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or (b) or (c) or (d) or (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax 43@ 10%.
Being an individual, no such deduction shall be made in the case of a shareholder, if-
(a) The dividend is paid by the company via any mode expect cash and
(b) The amount of such dividend or, as the case may be, the aggregate amounts of such dividend distributed or paid or likely to be distributed or paid during the FY through the company to the shareholder, does not exceed INR 5000: Provided further that the provisions of this section shall not apply to such income credited or paid to-
(a) The LIC established under the LIC Act, 1956 (31 of 1956), in respect of any shares owned by it or in which it has full beneficial interest;
(b) The GIC or to any of the four companies (hereafter in this proviso referred to as such company), formed by virtue of the schemes framed under the General Insurance Business (Nationalization) Act, 1972 (57 of 1972)- sub-section (1) section 1, in respect of any shares owned by the Corporation or such company or in which the Corporation or such company has full beneficial interest;
(c) Any other insurer in respect of any shares owned by it or in which it has full profitable interest;
Analysis
Rate at which tax will be deducted is 10% in case of resident shareholders.
No tax will be deducted in case-
1. Payment is made via any mode except cash AND aggregate amount of such dividend paid or likely to be paid is upto INR 5000
2. Dividend is paid to Life Insurance Corporation / General Insurance Corporation any other insurer where it has full profitable interest.