Taxation of Dividends in the hands of Individuals and shareholders

Companies rely on funds to manage the affairs of their business successfully. Shareholders in a company play a vital role in raising funds, and in that process, they become its stakeholders. They exercise control over the share of profits in proportion to the money they invest. Dividend is known as the share of profit by shareholders. Shareholders are also considered the owners of the company; therefore, they are entitled to get a dividend. There is not an exact definition of the dividend in the Companies Act, 2013. Under section 2(35), it merely mentions dividends as “any interim dividend.” With a view to distribute the profit among the shareholders of the company, the Declaration and Payment of Dividend under the Companies Act were enacted. In this article, we shall cover various provisions related to the Declaration and Payment of Dividend under the Companies Act, 2013.

What is Dividend?

If we go as per dictionary, a part of a company’s profits that is paid to the people who own shares in it is dividend.
There is one more concept of deemed dividend, which means the following transaction will be treated as dividends paid to you.
When a company in which the public are not substantially interested means a private company, whose shares don’t trade publicly, extends a loan or an advance to

•  Any of its shareholders who has more than 10% voting power in the company or
•  Any concern in which such shareholder is substantially interested or;
• Given for the individual benefit of such shareholder or;
• Any payment made on behalf of such shareholder;

To the extent, the company has accumulated as profits. Such payment would be deemed as a dividend under Section 2(22) (e), i.e., and they shall be treated as dividends.

But payments under these conditions will not be treated as deemed dividends. 

• If a loan is given by a company involved in money lending, where loans have been provided in the ordinary course of business;
• In case Loans granted to shareholders are subsequently adjusted against dividends declared and distributed later on.

Till AY 2020-2021, Dividend was exempt from Tax in the hands of the receiver via section 10(34). However, From F.Y 2020-21 i.e. AY 2021-2022, Section 10(34) has been withdrawn, which means the dividend is no more exempt. One more Section 115BBDA that granted taxability of dividend only if the amount of dividend is above Rs 10 lakhs is of no relevance from now on.

Taxability of Dividend from AY 2021-2022

Dividends are now taxable under the head Income from other sources or Business Income as the case may be,

If shares are held for trading purposes, then they are considered as business income, and if they are held as an investment, then taxable under the head Income from other sources.

Is there any deduction allowed from this Income?

Yes of course Assessee can claim deductions of all expenses which have been incurred to earn that dividend income such as interest on the loan amount of which is used to invest, collection charges, etc in case taxable under business income.

Also, Assessee can claim a deduction to the extent of 20% of total dividend income but the deduction is allowed only if it is related to interest expenditure. No other expense is allowed as deduction.

The applicable rate of Tax on dividends

The dividend shall be taxable at normal tax rates as applicable except in the case of resident Individual being an employee of Indian company or subsidiary engaged in IT, Entertainment, pharmaceutical or biotech industry receives a dividend in respect of GDRs issued by such company under Employees Stock option Scheme (ESOPS), the dividend shall be taxable at the rate of 10 % without any deduction under income tax act.

TDS Applicability on Dividend Income

• As per the latest provisions, An Indian Company is obligated to deduct Tax at source under section 194 & 195 in the case of residents and non –resident shareholders respectively. The said company may be a listed company or an unlisted company.
• The rate of TDS is 10 % under section 194 and the threshold limit is Rs 5000 which means if you are a resident individual and receive up to Rs 5000 as dividend in a year, no tax will be deducted. 
• Due to the ongoing COVID-19 pandemic rate of TDS reduced to 7.5% instead of 10% w.e.f 14.05.2020 and shall be applicable on payments made till 31.03.2021.
• As the assessee mentioned above is an individual, the threshold limit does not apply in case the shareholder is a HUF, Firms, Company, Trusts, etc. i.e. Tax is required to be deducted on the entire dividend amount in cases of these assesses.
• Moreover, threshold limit of Rs 5000 applies only when the dividend is paid through a mode other than cash. 
• Also, if the shareholder fails to provide his PAN to the company then the rate applicable shall be raised to 20 %.

Who all are exempt from this deduction of Tax?

NO Tax is required to be deducted when the shareholder is one of the following insurance companies-

• Life Insurance Corporation of India
• General Insurance Corporation of India
• Any other insurer

In respect of shares owned by it.

How can you save yourself from this TDS deduction?

No Tax is deducted if the assessee file FORM 15G/FORM 15H to the company paying the dividend declaring their income to be below the taxable limit.

A non-resident individual cannot furnish FORM 15G OR FORM 15H.

Further, no tax is deducted if the assessee furnishes Lower or Nil TDS certificate under section 197. 

Dividend in case of Non-resident shareholder

In case the recipient shareholder is a non-resident individual then Tax shall be deducted under Section 195.

Dividend payment to non –resident shareholders is subject to deduction of Tax at a rate of 20% increased by surcharge and health and education cess of 4%. A lower rate may apply if the benefit of the tax treaty /DTAA is available.

Advance tax liability on dividend income

If the shortfall in the advance tax instalment or the failure to pay the same on time is on account of dividend income, no interest under section 234C shall be charged provided the assessee has paid full tax in subsequent advance tax instalments. However, this benefit shall not be available in respect of the deemed dividend as referred to in Section 2(22) (e).

Conclusion

The dividend earned from an Indian company was exempt until 31 March 2020 (FY 2019-20). Now the Finance Act, 2020 changed the taxability of dividend and all dividend received on or after 1 April 2020 is taxable in the hands of the shareholder. The Finance Act, 2020 also introduced a TDS on dividend distribution by companies and mutual funds on or after 1 April 2020.  While dividend obtained from a foreign company will be added to the total income under the head Income from other sources of the taxpayer and will be taxed at the rates applicable to the taxpayer.

Also in the case of dividends from foreign companies, the investor can claim deduction only for the interest expense restricted to 20% of the gross dividend income as discussed above.

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