Income Tax on Dividend Income A.Y. 2021-22 and onwards

Dividend income taxable in hands of shareholders w.e.f. 1-4-2020

Till Assessment Year 2020-21, the dividend income from a domestic company was exempted in the hands of shareholders by virtue of exemption under section 10(34) of the Income Tax Act. But in this case, the company was liable to pay Dividend Distribution Tax (DDT) under section 115-O. However, the Finance Act, 2020 has made provisions of section 115-O ineffective which means that the domestic companies are no more liable to pay DDT on such dividends paid by them. Thus, with effect from A.Y. 2021-22, 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. Thus, the shareholders are now required to declare the dividend income while e-filing of income tax return.

Section 115BBDA not relevant from A.Y. 2021-22

Due to this amendment, Section 115BBDA has also lost its relevance. Section 115BBDA provides for the taxability of dividends over Rs. 10 Lakhs in the hands of the shareholders. Since from A.Y. 2021-22, 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 is of no effect.

Dividend income- Whether Business income or other sources of income for a resident shareholder

Any person can engage in securities either as a trader or as an investor. We all are aware that any income derived from trading activities is taxable under the head “Income from Business or Profession”. Therefore, if any person holds shares for trading purposes, then the dividend income thereon shall be liable to tax as ‘Business Income’ under the head “Income from Business or Profession” while doing income tax return filing. But if the shares are hold as an investment, the dividend income shall be taxable under the head “Income from other sources”.

When dividend income shall be taxable

• Final Dividend: According to Section 8 of the Income Tax Act, the Final dividend including deemed dividend shall be taxable in the year in which the dividend is declared, distributed, or paid whichever is earlier.

• Interim Dividend: Interim dividend is chargeable to tax on a receipt basis i.e. in the year in which it is received by the shareholder.

Deductions admissible from dividend income

Deductions admissible from dividend income depend on whether it is assessed to tax as a business income or other source income.

Tax rate applicable on dividend income to a resident shareholder

Dividend income shall be chargeable to tax at the normal tax rates as applicable to an assessee.

Exception:

In the case of a resident individual who is an employee of an Indian company or its subsidiary engaged in the IT, Entertainment, Pharma, or Bio-technology industry, dividend in respect of GDRs issued under an ESOP in foreign currency shall be taxable at the concessional tax rate of 10% without providing any deduction under the Income Tax Act.

Obligation of Indian companies to deduct TDS

• The domestic companies shall be no more liable for payment of DDT on dividend distributed to shareholders w.e.f. 01-04-2020.
• However, the domestic companies shall be liable to deduct TDS under section 194 or 195 of the Income Tax Act, 1961 in case of resident & non-resident shareholders respectively.

Rate of TDS u/s 194 in case of resident shareholders

• TDS shall be deducted at the rate of 10% from dividend distributed to the resident individual shareholder if the amount of dividend to such shareholder in aggregate in that year is more than Rs. 5,000.
• In case of assessee other than resident individual, the threshold limit of Rs. 5,000 is not available. It means that in the case of HUF, Firms, LLP, company shareholders, TDS shall be deducted on dividend payment of even Rs. 1.

TDS on Dividend rates in case PAN is not available

If PAN of the resident shareholder is not available, TDS shall be deducted by the domestic company at the rate of 20%.

TDS on dividend in case of non-filers under section 206AB

A new section 206AB has been inserted by Finance Act 2021 which provides for deduction of TDS at higher rates in case of non-filers. While deduction of TDS, the domestic companies will have to apply the provisions of this section as well. According to section 206AB, in the case of specified persons (non-filers of ITR), TDS is required to be deducted at twice the applicable TDS rates.

So, if section 206AB is applicable to a shareholder, the company shall deduct TDS at the rate of 20% instead of 10%.

Read the article on Section 206AB: https://www.taxwink.com/blog/section-206ab-income-tax-act

When TDS is not required to be deducted on dividend u/s 194

• As per Section 194, no tax shall be required to be deducted when the dividend is paid or payable to LIC, GIC or any other insurer in respect of shares owned by it.
• Further, no TDS shall be deducted in the following cases also:
  (a) In case, 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

Note: In this article, the discussion is focused only towards taxability of dividend income in case of resident shareholders only. In the case of non-resident shareholders, TDS shall be deducted under section 195 of the Income Tax Act. Further, the provisions of Double Taxation Avoidance Agreements (DTAAs) and Multilateral Instruments (MLI) will also play an important role. Therefore, the taxability issue of dividend income in the case of non-residents/ foreign companies shall be dealt by us in a separate article.

Disclaimer: The above article is meant only for informative purposes. Readers are requested to act diligently and consult with a professional before applying the contents of the above article.

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