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Income Tax on Dividends — Explained
Most people own stocks, thus dividends are popular. Company earnings are paid as dividends. Learn Indian dividend types, forms and their taxation.
This document covers
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
| S.No | Particulars | Final Dividend | Interim Dividend |
|---|---|---|---|
| 1 | Definition | If the dividend is declared at Annual General Meeting of the company, it is known as final dividend | If the dividend is declared and paid during an accounting year i.e., before the finalization of accounts for the year, it is known as interim dividend. |
| 2 | Declaration | Recommended by Board of Directors and approved by shareholders at AGM | Announced by Board of Directors |
| 3 | Time of Declaration | After preparation of financial statements | Before preparation of financial statements |
| 4 | Revocation | It cannot be revoked | It can be revoked with the consent of all shareholders |
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
- 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.
- 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.
- 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.
- 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.
- 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.
IMPORTANT NOTE
- Bonus Shares given to equity shareholders are not treated as dividend
- If the loan is not covered by accumulated profits, it is not deemed as dividend.
- Any distribution made out of profits of company after the date of liquidation is not dividend. It is a repayment towards Capital.
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.