Taxability of Dividend Income in India

What is dividend?

Dividend means any sum received by a shareholder in proportion to this shareholding in the company out of the total sum distributed by the company. As per section 2(22) of the Income Tax Act, the definition of dividend is a inclusive definition and it means dividend as normally understood and includes in its connotation several other receipts set out in the definition.

The term Dividend includes Deemed dividends of the following nature-

  • Any distribution of Capital assets of the company whether capitalized or not, if such distribution entails by company any release of assets of the company to its shareholders- Section 2(22)(a).
  • Any distribution of debentures, debenture stocks, deposits certificate to shareholders, bonus shares to preference shareholders  by the company out of the accumulated profits, whether capitalized or not- Section 2(22)(b).
  • Any distribution to the shareholders on the liquidation of the company to the extent the distribution is attributable to the accumulated profits of the company- Section 2(22)(c).
  • Any distribution to its shareholders by the company on the reduction of its capital, to the extent of the accumulated profits of the company- Section 2(22)(d).
  • Any payment by way of advance or loan by a closely held company following-
  1. Any concern in which shareholder is a member or partner and in which he has a substantial interest or,
  2. A person acting on the behalf or for the individual benefit of any such shareholder- Section 2(22)(e).

Followings Are Not Treated as Dividend-

  • Any payment made by the company on the company on the purchase of its own shares as per section 77A of the Companies Act, 1956.
  • Distribution of shares by the resulting company to the shareholders of the demerged company.

Tax on Dividend

  • Any dividend received from Indian Company is exempt from tax in the hands of the shareholders but the company is liable to pay Dividend Distribution Tax, except in case of deemed dividend referred in the Section 2(22)(e).
  • Any dividend received from Foreign Company is taxable in the hands of the shareholders.
  • As per Section 115O, the dividend distribution tax for Indian company is 15% plus applicable surcharge and educational cess, and the dividend distribution tax is payable by the company even if there is no income tax payable by the company for that financial year.
  • Dividend distribution tax should be deposited to the Central government within 14 days from the date of
  1. Declaration of dividend
  2. Distribution of dividend
  3. Payment of dividend

Whichever is earlier.

  • No deduction is allowed for the company of the dividend distribution tax paid by the company.
  • No Dividend distribution tax is applicable for any company developing, developing and operating, operating and maintaining in a Special Economic Zone.
  • To avoid the cascading effect of the dividend distribution tax, relief is provided that the dividend received by a company liable for dividend distribution tax shall be reduced by dividend ( for same Financial year), which satisfies the following conditions-
    • Received from its subsidiary.
    • Subsidiary has paid the dividend distribution tax.

Company shall be subsidiary for reduction where another company holds more than half in nominal value of equity share capital of the company. Further such amount of dividend shall be taken into account for reduction only once.

  • Penalty is to be paid if dividend distribution tax is not deposited to the central government within 14 days and the penalty is simple interest @ 1% per month from the date immediately after the due date till it is actually been paid by the company.
  • Penalty under section 271(c) – If any person fails to pay the whole or part of the tax as required under section 115O, then such person is liable to pay penalty of the sum equivalent to the sum he fails to pay.
  • Prosecution under Section 276B- If any person fails to pay the whole or part of the tax as required under section 115O, then such person shall be punishable with rigorous imprisonment for a term not less than 3 months and can extend up to 7 years.

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