Income Tax on Dividends

Dividend is the sum paid to a shareholder of a company proportionate to his/her shareholding in

the company. Dividends received by a taxpayer in India can be divided into three types as
follows:

 Dividends from a domestic company.

 Dividends from a foreign company.
 Divided or any other income distributed by Mutal Funds.

Dividend Received from a Domestic

Company
Dividend announced by a private limited company, one person company or limited company
incorporated in India fall under the category of “Dividend declared by a Domestic Company”.
Under the Income Tax Act, any amount declared, distributed or paid by a domestic company by
way of dividends is exempt from Income Tax.

In India, dividend distribution tax is levied on the dividends declared or distributed in the
hands of a dividend paying company rate than the dividend receiving shareholder. Thus, when a
dividend paying company has paid dividend distribution tax on the dividends declared or
distributed, the dividend would be exempted from Income Tax in the hands of the recipient.

However, as per section 115BBDA, in the case of a “specified assessee”* dividend received by a
shareholder would be chargeable under Income Tax at the rate of 10%, if the aggregate amount
of dividend received from a domestic company during the year exceeds Rs. 10,00,000. A
specified assessee means a person other than:

 A domestic company; or
 A fund or institution or trust or any university or other educational institution or any
hospital or other medical institution.
 A trust or institution registered under section 12A or section 12AA.

Dividend Received from a Foreign

Company
Dividend received from a foreign company is taxable under the head “Income from Other
Sources” when received by a resident taxpayer. As divided received from a foreign company is
added to the head “Income from Other Sources”, the taxpayer will be charged income tax at the
rates applicable to the taxpayer.

Foreign Company Dividends Received by

an Indian Company
Dividend received by an Indian company from a foreign company is charged under the head
“Income from Other Sources” and taxed at the Income Tax rate applicable for
companies. Since, companies are normally taxed at 30%, dividend received from a foreign
company would also be taxed at 30% in the hands of an Indian company.

However, a special concession in Income Tax rate is provided under section 115BBD for
dividends received by Indian companies that hold 26% or more shareholding in the Foreign
Company that declared the dividend. Dividend received by an Indian company from a foreign
company in which the Indian company holds 26% or more in nominal value of the equity share
capital is taxable at a concessional flat rate of 15% (plus surcharge and cess as applicable).

Dividends Double Taxation Avoidance

Relief from double taxation on foreign company dividends can be claimed by taxpayers, if the
dividend received is taxed in India and in the country to which the foreign company belongs.
Double taxation avoidance of dividends received from a foreign company must be based on
Double Taxation Avoidance Agreement, entered into between the Government of India and that
country (if any). If there is no Double Taxation Avoidance Agreement with the foreign country,
then the taxpayer can claim relief under section 91.

Section 91 of the Income Tax Act

Section 91 of Income Tax Act ,1961 states:

(1) If any person who is resident in India in any previous year proves that, in respect of his
income which accrued or arose during that previous year outside India (and which is not deemed
to accrue or arise in India), he has paid in any country with which there is no agreement
under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or
otherwise, under the law in force in that country, he shall be entitled to the deduction from the
Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian
rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax
if both the rates are equal.

(2) If any person who is resident in India in any previous year proves that in respect of his income
which accrued or arose to him during that previous year in Pakistan he has paid in that country,
by deduction or otherwise, tax payable to the Government under any law for the time being in
force in that country relating to taxation of agricultural income, he shall be entitled to a deduction
from the Indian income-tax payable by him—

(a) Of the amount of the tax paid in Pakistan under any law aforesaid on such income which is
liable to tax under this Act also; or

(b) Of a sum calculated on that income at the Indian rate of tax;

Whichever is less.
(3) If any non-resident person is assessed on his share in the income of a registered firm
assessed as resident in India in any previous year and such share includes any income accruing
or arising outside India during that previous year (and which is not deemed to accrue or arise in
India) in a country with which there is no agreement under section 90 for the relief or avoidance
of double taxation and he proves that he has paid income-tax by deduction or otherwise under
the law in force in that country in respect of the income so included he shall be entitled to a
deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed
income so included at the Indian rate of tax or the rate of tax of the said country, whichever is the
lower, or at the Indian rate of tax if both the rates are equal.

Divided or Income distributed by Mutual

Funds
Any income received by a taxpayer in respect of units from the Administrator of a specified
undertaking or a specified company or Mutual Fund specified under Clause (23D) will be exempt
from Income Tax. Any income of a mutual fund registered under the SEBI Act, 1992 is exempt
from income tax under Section 10 (23D) of the Income Tax Act, 1961. Thus, any income
generated by the fund through investments, either in the form of capital gains (short term or long
term), dividends or interest is exempt from income tax.