A complete guide  on Dividend Income from Foreign Company in India and Tax on Dividend Income in India

Dividend income is typically subject to tax in both the assessee’s country of residence and the country of origin, and as a result, the country of residence grants a credit for taxes that the assessee paid in the country of origin. Consequently, the dividend income will be taxed in India in accordance with the Act’s provisions or the applicable DTAA (Double Taxation Avoidance Agreement), whichever is more advantageous. In this article we will look into the information on Dividend income from Foreign Company, DTAA Relief, Tax on Dividend Income in India, and Dividend received from Foreign Company in India.

Introduction

According to the Income Tax Act, dividend income received from a foreign corporation is completely taxable in India. However, Section 10 provides an exemption from taxation for dividends received from Indian companies that were subject to the dividend distribution tax. However, the dividend received will be subject to a 10% tax under Section 115BBDA, which only applies to resident individuals, HUF (Hindu Undivided Family), and firms. Only if the total amount of dividends received from domestic companies during the year exceeds INR 10 lakhs will the clause come into effect.

Before going through the information on Dividend Income Received from the foreign company in India. Let’s have a quick look at the tax on dividend income in India.

Tax on Dividend income in India

• The tax treatment of dividends depends on whether the dividend recipient is a trader or a stock investor.
• The revenue that the person makes from their trading activity is subject to taxation as “business income.”
• Therefore, dividend income is taxable under the category “income from business or profession” if shares are maintained for trading purposes.
• The income received in the form of dividends if shares are held as an investment is subject to taxation under the category of “income from other sources.”
• If the dividend is taxable as business income, the taxpayer may deduct all costs associated with earning the dividend income, including collection costs, loan interest, and other relevant costs.
• The taxpayer may claim a tax deduction of up to 20% of the total dividend income for the interest expenses only if the payout is taxed as income from other sources.

Any extra costs, including commission or salary paid to a banker or another individual in order to obtain such a payout, are not tax-deductible.

Dividend income from Foreign Company in India

It is taxable to receive a dividend from a foreign corporation. The term “income from other sources” will be used to classify it for tax purposes. Dividends received from a foreign corporation are added to the taxpayer’s overall income and are subject to tax at the taxpayer’s individual rates.

For instance, if the taxpayer is subject to the 30% tax slab rate, the dividend will likewise be subject to the 30% tax rate and the 30% cess. Even when receiving a foreign dividend, the investor may only deduct interest costs up to a maximum of 20% of the gross dividend income.

However, under Section 194 of the Income-tax Act of 1961, the firm issuing the dividend will be required to deduct TDS (Tax Deducted at Source). According to this clause, 10 percent TDS is applied to dividend income for individuals over INR 5000; if the beneficiary of the dividend income does not provide a PAN (Permanent Account Number), the rate would increase to 20 percent.

Information on Dividend received from Foreign Company in India

• Taxes due in advance on dividend income

No interest under section 234C shall be assessed if the shortfall in the advance tax instalment or the failure to pay it on time is due to dividend income as long as the assessee has paid the full amount of tax in future advance tax instalments. However, the considered dividend mentioned in Section 2(22) of the Income Tax Act, will not be eligible for this benefit.

• Elimination of Double Taxation

Both India and the foreign company’s home nation tax dividends that are received from overseas companies. However, if the tax on the dividend of an international corporation has been paid twice (i.e., in both countries), the taxpayer may be eligible for double taxation relief.

The relief sought maybe pursuant to Section 91 of the Income Tax Act or pursuant to the conditions of the double taxation avoidance agreement that the Government of India has with the nation to which the foreign firm belongs (in case no such agreement exists). As a result, the taxpayer will not have to pay taxes twice on the same income.

• Concessional Rate

Indian businesses must pay surcharges and relevant cess in addition to a 30 percent income tax. As a result, an Indian firm that receives a dividend from a foreign company is also subject to a 30% tax. If both companies are related, there is a reduced rate of tax applicable to the dividend that an Indian firm receives from a foreign corporation.

Dividends from related companies are taxed at a fixed rate of 15% plus any relevant surcharges and cess if the Indian Firm owns 26% or more of the notional value of the equity share capital of the foreign company. The purpose of implementing the rule is to ensure that the company receiving the dividend income is not subject to an excessive financial tax burden where two firms are related.

Double Taxation Avoidance Agreement (DTAA) Relief

The taxpayer should take into account both the requirements of the Double Taxation Avoidance Agreement (DTAA) signed with India and the provisions of income tax law if the dividend received by the Indian resident has already been taxed in that country. If a taxpayer receives a dividend from a foreign corporation that was subject to double taxation, they maybe eligible for double taxation relief under the terms of the Double Taxation Avoidance Agreement. The Assessee may submit a DTAA remedy petition under Section 91.

Conclusion

The Budget 2021 has amended Section 115JB to provide that dividend income and expenses claimed in respect thereof shall be added back or reduced from the net profit if such income is taxed at a lower rate than MAT (Minimum Alternate Tax) due to DTAA, taking into account the taxability of dividend in the hands of the foreign company. It should be emphasized that the Act’s or the applicable DTAA’s rules, whichever is more advantageous, will govern how dividend income is taxed in the hands of a foreign firm.