Income Tax on Dividends — Explained

This document covers

1. Meaning of Dividend
2. Final Dividend & Interim Dividend
3. Forms of Dividends
4. Taxability of Dividends

1. Meaning of Dividend

• The dividend represents the shareholders return on their investment or capital in the company
• There are 2 types of Dividends. They are
  • Final Dividend
  • Interim Dividend
• In general, shareholder approval of dividends is contingent upon the recommendation of the Board of Directors at the Annual General Meeting.
• Dividends are declared in proportion to a share's nominal or face value.

2. Final Dividend & Interim Dividend

The differences between final dividend and interim dividend are as follows

3. Forms of Dividends

Section 2(22) (a) to e covers the definition of dividend. As per this, the following receipts are deemed to be dividend

1. Distribution of accumulated profits to shareholders entailing release of the company’s assets
   • If the accumulated profits are distributed in cash, it is dividend in the hands of shareholders.
   • If the accumulated profits are distributed in kind (delivery of shares), the market value of such shares on the date of distribution of dividend is deemed dividend in the hands of shareholder.
2. Distribution of debentures, deposit certificates to shareholders and bonus shares to preference shareholders
   • Any distribution of debenture, debenture stock or deposit certificate in any form by the company to its shareholders or distribution of bonus shares to preference shareholders will be deemed as dividend in the hands of shareholders
   • The market value of such bonus shares is deemed as dividend in the hands of preference shareholders.
   • The market value of debentures, deposit certificates is deemed as dividend in the hands of shareholders.
3. Distribution on Liquidation :
   • Any distribution to the shareholders of the company on its liquidation to the extent of profits of the company before its liquidation is deemed to be dividend.
4. Distribution on reduction of Capital
   • Any payment by a company in which public are not substantially interested of any sum by way of advance or loan to any shareholder who is the beneficial owner of 10% more of voting power of the company will be deemed as dividend to the extent of accumulated profits.
5. Advance or Loan by a closely held company to its shareholder.
   • Any payment by a company in which public are not substantially interested of any sum by way of advance or loan to any shareholder who is the beneficial owner of 10% more of voting power of the company will be deemed as dividend to the extent of accumulated profits.
6. Amount received by shareholder on buy back of shares by domestic companies :
   • Upto 30th September 2024: Amount received by shareholders on buyback of shares by a domestic company is exempt from Income tax in the hands of shareholders u/s 10(34A). The companies were required to pay the taxes @ 20% + surcharge + Education Cess u/s 115QA
   • W.e.f 01st October 2024: Amount received by shareholders on buyback of shares by a domestic company is taxable as dividend in the hands of shareholders w.e.f 01st Oct 2024
   Example :

   ---

   Mr Balram has purchased 20 Shares of Radha Krishna Limited @ Rs 1000 per share on 20th Jan 2024. The total cost of acquisition is Rs 20,000. Now Radha Krishna Limited buys back the shares of Mr Balram @ Rs 1500 per share on 10th Oct 2024. Now the taxability is as follows

   • Taxable dividend in the hands of Balram – 20 shares *Rs 1500 = Rs 30,000 taxable at slab rates of Mr Balram
   • Short Term Capital Loss = Sale Consideration- Cost of Acquisition = 0-20,000 = Loss of Rs 20,000 which can be set off or carry forward

   If the shares were bought back before 30th Sep 2024, the amount received of Rs 30,000 is exempt in the hands of Mr Balram

4. Taxability of Dividends

• Dividend Income is always taxable under the head "Income from Other Sources".
• Dividend u/s 2(22) (a) to (d) : The dividend distributed u/s 2(22) (a) to (d) will be considered as income of the financial year in which it is distributed.
• Dividend u/s 2(22)(2) : The dividend distributed u/s 2(22) (e ) will be considered as income of the financial year in which it is paid.
• Rate of Income Tax : The dividend received (Domestic or Foreign Dividend) is taxable at the "Slab Rates of taxpayers".
• Advance Tax: The taxpayers are required to pay Advance Tax on the dividend received at quarterly intervals. Otherwise, the taxpayers are required to pay interest u/s 234B and 234C.
• TDS: The company who is paying Dividends to its shareholders are required to deduct TDS as follows.
  • Resident Shareholders: 10% if the dividend paid exceeds Rs 5000 per financial year. It is covered by section 194.
  • Non-Resident Shareholders: 20% on the dividend paid. There is no threshold. It is covered by Section 195
• If the taxpayer has submitted Form 15G/15H to the companies paying dividends, NO TDS will be deducted by the companies
• If the taxpayer PAN and Aadhaar is not linked, the dividend paying companies will deduct TDS @ 20% as PAN of taxpayer is inoperative.