Dividend Income

Dividends usually refer to the distribution of profits by a company to its shareholders. However, certain receipts are also deemed as dividend. The deemed dividend, as defined in Section 2(22) of the Income-tax Act, includes following:

1. Distribution entailing the release of company's assets;
2. Distribution of debentures, or deposit certificates;
3. Distribution of bonus shares to preference shareholders;
4. Distribution on liquidation;
5. Distribution by the company on reduction of its capital; and
6. Loan or advance to shareholders.
7. Payment by a Company on purchase of its own shares from a shareholder [subject to certain exception]

Dividend declared, distributed, or paid on or after 01-04-2020 is taxable in the hands of the shareholders. Where the dividend was declared, distributed, or paid before 01-04-2020, shareholders were exempt from paying tax on the dividend as per section 10(34) as the company was liable to pay Dividend Distribution Tax (DDT) on such dividend.

A shareholder can deduct only the interest expenditure from dividend income subject to a limit of 20% of total dividend income. No further deduction is allowed for any other expenses, including commission or remuneration paid to a banker or any other person to realize such dividend.

Tax on dividends from various securities

Dividend income is taxable at the applicable tax rate or at a special rate which depends on two factors which are the residential status of the recipient and the nature of security. The dividend can be classified into the following:

(a)   Dividend from shares

• If the recipient is a resident – taxable at the applicable tax rate and interest expenditure incurred to earn such dividend income shall be allowed up to 20% of total dividend income.
• If the recipient is a non-resident – taxable at a special rate of 20% subject to provisions of DTAA and no expenditure shall be allowed.

(b)   Dividends from mutual funds

• If the recipient is a resident – taxable at the applicable tax rate and interest expenditure incurred to earn such dividend income shall be allowed up to 20% of total dividend income.
• If the recipient is a non-resident – taxable at a special rate of 20% subject to provisions of DTAA and no expenditure shall be allowed. However, if the dividend is received by an FPI in respect of units purchased in foreign currency, the tax rate shall be 10%.

(c)   Dividends from GDRs

• If the dividend is taxable under section 115AC – taxable at 10% and no deduction is allowed.
• If the dividend is taxable under section 115ACA – taxable at 10% and no deduction is allowed.
• In other cases – taxable at the applicable tax rate and interest expenditure incurred to earn such dividend income shall be allowed up to 20% of total dividend income.

(d)  Dividends from REITs/InVITs

• If the recipient is a resident – taxable at the applicable tax rate and interest expenditure incurred to earn such dividend income shall be allowed up to 20% of total dividend income.
• If the recipient is a non-resident – taxable at a special rate of 20% subject to provisions of DTAA and no expenditure shall be allowed.​