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income (https://vjmglobal.com/blog/income-tax/dividend-income/) » Income Tax on Dividends Income

July 14, 2020

Income Tax on Dividends Income

CA. Kavit Vijay

(https://vjmglobal.com/author/kavit/) (https://vjmglobal.com/author/kavit/)
 (https://vjmglobal.com/)

Prior to the Finance Act, 2020, companies and mutual funds were liable to pay
“Dividend Distribution Tax (https://vjmglobal.com/blog/income-tax/dividend-
distribution-tax-and-dividend-income/)” on dividends declared or distributed.
Therefore, Dividend income was exempted in the hands of shareholders. However,
Finance Act, 2020 deleted the concept of Dividend Distribution tax and Tax on
dividends income will be in the hands of shareholders for all the dividends paid or
distributed by a Company on or after 1st April 2020.

At par with other provisions of the Income tax Act, Finance Act, 2020 imposed
liability to deduct TDS on dividend Income distributed/paid to shareholders.
Hence, the Company will have to deduct tax at source (TDS) on all the dividend
paid or distributed to shareholders in accordance with provisions of Section 194
and section 195 of Income-tax Act 1961.

1. Companies to deduct TDS on dividend

distributed (Section 194 of Income Tax Act)
As per section 194 of Income Tax Act, 1961, the Principal officer of an Indian
Company or a Company declaring and making payment of the dividend within
India is required to deduct TDS if the following conditions are satisfied :

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The dividend is paid to the shareholder residing in India; and

Following nature of dividends are covered within the meaning of Clause (a)
to (e) of Section 2(22):

Dividend distributed by the company out of accumulated profits, if such

distribution results in release of assets of the company (Section 2(22)
(a))

Distribution of debentures, debenture-stock or deposit certificate to

shareholders or distribution of bonus to preference shareholders
(Section 2(22)(b))

Distribution by company to its shareholders at the time of liquidation

(Section 2(22)(c))

any distribution to its shareholders by a company on the reduction of its

capital (Section 2(22)(d)

Any payment made by closely held company (i.e., company in which

public is not substantially interested) by way of advances or loans to:

shareholders holding voting rights of not less than 10%; or

Any concern in which such shareholder is a partner or member or

having substantial interest.  

This section also applies to the dividend paid on preference shares.

2. When to Deduct TDS on dividend i.e. Tax on

Dividends
The Company is liable to deduct TDS on earlier of any of the following dates:

Before making payment of Dividend (In cash or any other mode)

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Before making any payment or distribution to a shareholder

3. What are the Rate of TDS on Dividend

Income
Particulars TDS Rate effective TDS rate after 13th May
up to 13th May 2020 up to 31st March
2020 2020

A resident shareholder 10 % 7.5%

who has furnished PAN

Resident Shareholder 20 % 20%

who has not Furnished
PAN

4. Cases where companies are not liable to

deduct TDS on dividend distributed
In following cases of payment of dividend, the companies is not liable to deduct
TDS:

When the aggregate amount of dividend paid to an individual during the

financial year is not more than Rs 5000. However, dividends should be paid
by any mode other than cash. 

The dividend paid to following persons subject to submission of sufficient

documents:
 Life Insurance Corporation of India
(https://en.wikipedia.org/wiki/Life_Insurance_Corporation); or 

General Insurance Corporation of India; or 

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any other insurer  for shares held by it and in which he has full beneficial
interest.

Where a declaration is filed by the resident shareholder in Form 15G

(Applicable to any person other than the company or the firm) or 15H
(applicable to an individual who is above age of 60 years).

Mutual Funds subject to the submission of declaration that it is covered

under section 10(23D) of Income Tax Act.

Alternative Investment Fund (AIF) established or incorporated in India having

an income that is exempt under section 10 (23FBA) of Income Tax Act and
they are governed by SEBI regulations as Category I or Category II. AIF is
required to submit a documentary proof to that effect.

The corporation which is established by or under a Central Act which is,

under any law for the time being in force has income exempt from Income
Tax. Corporation is needed to submit necessary documents to substantiate
that under which central act corporation covered.

Other resident Non-Individual shareholders who are exempted from the

provisions of TDS vide section 196 of the Income Tax Act 1961such as
Government of India, Reserve Bank of India etc.

For claiming the exemption from TDS on Dividend, it is important to submit proper
required documents along with a self-declaration to the company.

5. TDS on Dividend distributed to non-

resident Shareholders
Section 195 of The Income Tax Act states that TDS on dividend paid to non-
resident shareholders is to be deducted on “Rates in Force”. This is defined in
Section 2(37A) which is as under :

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“for the purposes of deduction of tax under section 194LBA or section
194LBB or section 194LBC or section 195, the rate or rates of income-tax
specified in this behalf in the Finance Act of the relevant year or the rate
or rates of income-tax specified in an agreement entered into by the
Central Government under section 90, or an agreement notified by the
Central Government under section 90A, whichever is applicable by
virtue of the provisions of section 90, or section 90A, as the case may
be.”

Thus the rate as prescribed in Finance Bill 2020 for TDS is 20% while a surcharge at
the rate of 15% is also added. 

So The TDS rates on dividends distributed to Non-Resident shareholders are as

follows.

Particulars TDS TDS TDS TDS

(Dividend < (Dividend (Dividend (Divide
Rs 50 Lakhs) Between Rs between Rs. 1 Rs 10 Cr
50 Lakhs and Crore  and 10
Rs.  1 Crore) Crore)

Non 20.80%(TDS- 22.88%(TDS- 23.92%(TDS- 23.92

Resident 20%EC & 20%EC & 20%EC & (TDS-20%
Indian SHEC- SHEC- SHEC- SHEC
shareholder 4%Surcharge- 4%Surcharge- 4%Surcharge- 4%Surcha
NIL) 10%) 15%) 15%)
 Foreign 20.80%(TDS- 20.80%(TDS- 21.22%(TDS- 21.84%(T
Company 20%EC & 20%EC & 20%EC & 20%EC
SHEC- SHEC- SHEC- SHEC
4%Surcharge- 4%Surcharge- 4%Surcharge- 4%Surcha
NIL) NIL) 2%) 5%)
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5.1 Provisions of The Double Tax Avoidance

Agreement (DTAA)
Applying the provisions of section 90 of The Income Tax Act 1961, a non-resident
shareholder can opt for the provisions of DTAA between India and the country of
tax residence of the shareholder. For the purpose of availing benefits of DTAA
following documents needs to be provided by the nonresident shareholder :

Self-attested copy of Permanent Account Number (PAN Card), if any allotted

by the Indian Income Tax authorities;

Self-attested copy of Tax Residency Certificate (TRC) obtained from the tax
authorities of the country of which the shareholder is resident;

Self-declaration in Form 10F, if all the details required in this form are

Self-declaration by the non-resident payee containing such particulars/

confirmation as would be imperative to be governed by and/ or avail
benefits, if any, under the applicable DTAA

It should be noted that all the above documents should be self-attested by the
non-resident shareholder

5.2 Rate of TDS on Dividend paid to Foreign

Institutional Investors and Foreign Portfolio
Investors  
In case of the dividend paid to Foreign Institutional Investors and Foreign Portfolio
Investors TDS rate would be 20% (plus applicable surcharge and cess). DTAA
provisions are not applicable here.

5.3 Rate of TDS on Dividend paid to persons located

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in notified jurisdictional area under section 94A(1)

of Income Tax Act, 1961
The TDS rate would be 30% or at the Rates in Force for a shareholder who is a tax
resident of a country or territory as notified u/s 94A(1)of the Income Tax Act 1961. 

6. Lower rates/ NIL rate of TDS 

For residents as well as Nonresident Shareholders who provide a certificate U/s
197 of Income Tax Act 1961 for lower/ NIL rate of TDS
(https://vjmglobal.com/blog/lower-nil-tds-certificates/), such rate of TDS can be
considered on the submission of proper documents.

7. Treatment of Multiple Accounts under a

different category in DDT
There is a possibility that a shareholder holds multiple accounts under different
status/categories using single PAN. E.g. A person having 5 DEMAT Accounts under
the same PAN and dividend paid in 2 accounts are less than INR 5,000 each.
However, the declared dividend exceeds INR 5,000 in other 3  accounts. 

In such case, the highest rate of TDS applicable on any category/status shall
apply to the entire holding. E.g., in given example, TDS @ 7.5% will be deducted on
dividend declared in all 5 accounts despite dividend is received within exemption
limit in 2 accounts.

8. Conclusion
Thus, the abolition of the Dividend Distribution Tax has turned the total scenario of
taxation on dividends. Also, the compliance part for the Companies has
increased considerably. 

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DISCLAIMER: The views expressed are strictly of the author and VJM & Associates LLP. The
contents of this article are solely for informational purpose. It does not constitute professional
advice or recommendation of rm. Neither the author nor rm and its a liates accepts any
liabilities for any loss or damage of any kind arising out of any information in this article nor for
any actions taken in reliance thereon.

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