What is Dividend? Applicability of DDT and Tax on Dividend Income

Introduction

If a shareholder receives a dividend from a domestic firm during the Assessment Year 2020-21, he will not be obliged to pay any tax on the dividend since it is exempt from tax under section 10 (34) of the Act. The domestic firm, however, is obligated to pay a Dividend Distribution Tax (DDT) under section 115-O in such instances. The DDT was repealed by the Finance Act of 2020, reverting to the traditional taxation system, in which dividends are taxed in the hands of the investors. In this article information such as a tax on dividends, TDS on income from dividends, and applicability of DDT (Dividend Distribution Tax) is mentioned.

It is critical to understand the definition of dividends before moving on to the taxation of dividends. Let’s start with the basics and work our way up to the dividend tax.

What is Dividend?

The term “dividend” usually refers to a company’s profit distribution to its shareholders.

However, in accordance with Section 2 (22) of the Income Tax Act, the dividend must also include:

• Distribution of accumulated profits to shareholders, which involves the release of the company’s assets.

• Distribution of debentures or deposit certificates to shareholders from accumulated profits, as well as the issue of bonus shares to preference shareholders from accumulated profits.

• Distribution of accumulated profits to shareholders on the company’s liquidation.

• Distribution of accumulated profits to shareholders on the reduction of the company’s assets.

• Distribution of accumulated profits to shareholders on the reduction of the company’s.

Information on Tax on Dividend Income

Whether a dividend is taxable depends on whether the recipient is a trader or a security holder. The money derived from trading activities is taxable under the heading of business income. As a result, dividend income is taxable as income from a business or profession if shares are kept for trading purposes. Dividend income is taxable under the heading of income from other sources if shares are held as an investment.

When a dividend is taxed as business income, the assessee can deduct all expenses incurred to earn that dividend income, such as collection fees, interest on a loan, and so on. If the dividend is taxable as income from other sources, the assessee can deduct just the interest expense required to earn the dividend income up to 20% of the total dividend income. Any additional expenses, such as commission or remuneration is given to a banker or any other person for the purpose of realising such a dividend, are not deductible.

Applicability of DDT (Dividend Distribution Tax)

DDT must be paid within 14 days after the earliest of the following events, according to the income tax act:

• Dividend Distributions are declared.

• Dividends are paid

If the dividend is not paid by the due date, interest of 1% per month or a portion thereof is charged on the amount of the tax. The interest will be paid for the period commencing on the last day on which the tax was due and ending on the actual payment date.

TDS (Tax Deducted at Source) on Income from Dividend

• When submitting an ITR (Income Tax Return), the tax deducted will be applied as a credit against the taxpayer’s overall tax liability.

• TDS is required to be deducted at a rate of 20% for non-residents, subject to the terms of any DTAA (double taxation avoidance agreement).

• To enjoy the benefit of a reduced deduction due to a beneficial treaty rate with their nation of residence, non-residents must submit documentary verification such as Form 10F, declaration of beneficial ownership, certificate of tax residency, and other papers. When certain documents are missing, a higher TDS is deducted, which can be claimed when filing an ITR (Income Tax Return).

Tax on Dividend Income Received from Foreign Company 

A dividend from a foreign corporation is taxed. It will be taxed under the heading “other sources of income.” Dividends received from a foreign company will be included in the taxpayer’s total income and will be taxed at the taxpayer’s current rates.

Even in the case of a foreign dividend, the investor is only allowed to deduct interest expenses up to 20% of the gross dividend income.

However, under section 194 of the Income Tax Act of 1961, the firm declaring the dividend will be required to deduct TDS. According to this clause, if an individual’s dividend income exceeds INR 5000, TDS will be deducted at a rate of 10%; however, if the recipient of the dividend income does not provide a PAN (Permanent Account Number), the rate would be increased to 20%.

Double Taxation Relief for Dividend received from Foreign Company

Dividends received from a foreign firm are taxed in both India and the foreign company’s home country. The taxpayer can claim double taxation relief if the tax on an international company’s dividend has been paid twice (i.e. in both countries).

He can claim relief under Section 91 or under the provisions of a double taxation avoidance agreement entered into by the Government of India with the country to which the foreign company belongs (in case no such agreement exists). This means that the taxpayer will not be taxed twice on the same income.

FAQs on “Tax on Dividend Income”

1. What is the DDT (dividend distribution tax)?

In India, a firm must pay a 15% dividend distribution tax if it has declared, distributed, or paid any cash as a dividend. The provisions of DDT (Dividend Distribution Tax) were first included in the Finance Act of 1997. The tax is only payable by a domestic company.

2. What is the dividend ceiling?

Dividends are not limited in any way. If a firm makes a profit and wishes to transfer it to its shareholders, it can do so without restriction.

3. What is the frequency with which dividends are paid?

Dividends are paid on a monthly, half-yearly, quarterly, or annual basis, depending on the company or mutual fund institution that pays them.