Taxation of Dividend
What is dividend?
Dividend, as understood generally, means the amount paid to or received by a shareholder in proportion to his shareholding in a company, out of the total sum so distributed.
Income tax act provides an inclusive definition of the term dividend. This means, a particular distribution if not regarded as dividend as per the the extended meaning provided under sec 2(22) of the act but if cover by ordinary meaning as given above, still it shall be regarded as dividend.
As per sec 2(22) dividend includes:
- Any distribution entailing the release of a company’s assets
- Any distribution of debenture, debenture stock, deposit certificates and bonus to preference shareholders
- Distribution on liquidation of company
- Distribution on reduction of capital
- Any payment by way of loan or advance by a closely held company to a shareholder holding substantial interest provided the loan should not have been made in the ordinary course of business and money lending should not be a substantial part of the company’s business.
How dividend income is taxable?
If dividend comes under (a) to (d) of above, then under section 10(34) dividend income from an Indian company is not taxable in the hands of shareholders, instead the payer company will pay dividend tax under sec 115-O.
The payment or distribution under above clauses can be treated as dividend only to the extent of accumulated profits of the company. Any payment or distribution beyond accumulated profits shall not be regarded as dividend and can’t be taxed in the hands of payer company.
However deemed dividend falling under section 2(22)(e) of above and dividend from foreign company is taxable in the hands of shareholders u/s 56(2)(i) as income from other sources, regardless of the fact whether shares are held by the assessee as investment or stock in trade. In such cases payer company will not pay tax.
What is tax incidence of dividend?
The tax incidence may be summarized under the following table:
|Particulars||Dividend declared by an Indian Company|
|Dividend||Interim Dividend||Deemed dividend u/s 2(22)(e)|
|Basis of charge||Deemed as income of shareholder in which it is declared.||Deemed as income of the previous year in which the amount is unconditionally made available to the shareholder.||Treated as income of the previous year in which it is so distributed or paid.|
|Taxable in the hands of|
|2. Company declaring dividend||
Any dividend declared by a foreign company is always taxable in the hands of shareholder.
What is tax rate applicable on dividend?
|Dividend(as % of dividend)||Surcharge(as % of dividend tax)||Education cess(as % of dividend tax and surcharge)||Total|
|April 1, 2003 – March 31, 2004||12.5||2.5||Nil||12.8125|
|April 1, 2004 – March 31, 2005||12.5||2.5||2||13.0875|
|April 1, 2005 – March 31, 2007||12.5||10||2||14.025|
|April 1, 2007 – March 31, 2010||15||10||3||16.995|
|April 1, 2010 – March 31, 2011||15||7.5||3||16.60875|
|April 1, 2011 – March 31, 2013||15||5||3||16.2225|
|April 1, 2013 – Sept 30, 2014||15||10||3||16.995|
|Oct 1, 2014 – March 31, 2015||17.64706||10||3||19.99412|
|From April 1, 2015||17.64706||12||3||20.35765|
Position after Budget 2016:
For investors receiving dividend in excess of Rs 10 lacs per annum, budget 2016 proposes to tax at the rate of 10% of gross amount of dividend in addition to applicable dividend tax. Hence, additional tax @ 10% shall be payable by individual / HUF in case gross dividend received in financial year 2016-17 exceeds Rs 10 lacs.
Sec 115BBDA as inserted by sec 52 of Finance act 2016.
(1) Notwithstanding anything contained in this Act, where the total income of an assessee, being an individual, Hindu undivided family or a firm, resident in India, includes income in aggregate exceeding ten lakh rupees, by way of dividends declared, distributed or paid by a domestic company or companies, the income-tax payable shall be the aggregate of—
(a) the amount of income-tax calculated on the income by way of such dividends in aggregate exceeding ten lakh rupees, at the rate of ten per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of income by way of dividends.
(2) No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee under any provision of this Act in computing the income by way of dividends referred to in clause (a) of sub-section (1).
(3) In this section, “dividends” shall have the same meaning as is given to “dividend” in clause (22) of section 2 but shall not include sub-clause (e) thereof.’.
Is declaring dividend in always beneficial?
This depends on the facts of each case.
Case 1: In case payment is being made to a director, the company may have only three options, i.e., pay as dividend, as loan or advance or pay as remuneration. The result of each of these scenario is summarized as under:
- If paid as dividend: This will cost of company 20.35765% and no cost to director up to payment made of Rs 10 lakh. However any payment beyond Rs 10 lacs will cost adiitionally to director @ 11.536% or 10.3% as the case may be. Thus, overall tax bill for any payment beyond Rs 10 lacs is 31.89365%.
- If pay as remuneration: This will be tax saving for the company if payment does not come under disallowance and made within permissible limits of the companies act. However, it will be taxed in the hands of director @ 34.608% in case taxable income of director is above Rs 1 crore or 30.9% in other case.
- If paid as loan or advance: In this case such loan or advance shall be deemed to be income of director and taxable under his hand. This payment shall be taxable normally under the head income from other sources and all consequences as applicable in scenario b above will also applicable to his case also.
So, before taking decision as declaration of dividend, current taxable income of director shall be consider.