Everyone thinks Income Tax on dividend income for AY 2020-21 in India is exempt upto Rs 10 lakh for FY 2019-20). However, this is not scene in every type of dividends. Lets discuss the dividend and taxation on dividend in this article.
Meaning of Dividends : In general terms, the sum paid by the company from its profit to its shareholders is known as dividends. As per section 2(22) of the Income Tax Act, 1961, some specific transactions are defined as dividends. The section contains five parts which are discussed below.
Section 2(22)
Section 2(22)(a)
| Meaning | Assets may be cash or kindIf it is received as “KIND”, use market value for calculations.Distribution of Assets to the extent of Accumulated profits, capitalized or not.Accumulated Profits is the maximum amount treated as a dividend |
| Example | Accumulated profits of 50L out of which 30L are capitalized. Mr. A, the holder of 3%, got 1,20,000 which means 40L are distributed. A’s share is 1,50,000 but received 1,20,000.So, 1,20,000 considered as dividend u/s 2(22)(a) |
Section 2(22)(b)
| Meaning | Distribution of securities to the extent of accumulated profits, capitalized or not, for no consideration.Issue of debentures to Equity or Preference holder.Issue of bonus shares to the Preference holder.The market value of such securities are used for calculations |
| Example | Accumulated profits of 50Lakh out of which 30L are capitalized. Bonus share issued preference shareholder; market value is 40Ls So 40L is considered as dividend u/s 2(22)(b) |
Read Also: SEBI New rules for Multi- Cap Mutual Funds
Section 2(22)(c)
| Meaning | Distribution of assets by the company in the event of liquidation to the extent of accumulated profits, capitalized or notThe amount received is reduced by the deemed dividend u/s 2(22)(c), rest is used for the calculation of capital gainsAssets may be cash or kindIf it is received as “KIND”, use market value for calculations. |
| Example | XYZ ltd gone into liquidation, after payment of liabilities 50L of cash is left and land having a market value of 100L. The company has accumulated profits of 30L. Mr. A, the holder of 10% shares, receives 5L as cash and land worth 10L So out of 15L, 3L will be treated as deemed dividend u/s 2(22)(c) and the balance 12L will be treated as full value consideration for capital gains. |
| Particular | Amount (Rs.) |
| Total Assets Received (Cash or Kind) | XXXX |
| Less: Deemed dividend u/s 2(22)(c) (Accumulated profits X Proportion of holding) | (XXXX) |
| Full Value Consideration | XXXX |
| Less: Cost of acquisition of shares | (XXXX) |
| Capital Gain | XXXX |
Section 2(22)(d)
| Meaning | Distribution of amount to shareholders in connection toa reduction of share capital, to the extent of accumulated profits, capitalized or not. |
| Example | XYZ ltd refunded 2L to shareholders to reduce the face value of the share to Rs8 from Rs. 10So, 2L will be considered as deemed dividend u/s 2(22)(d) |
Section 2(22)(e)
| Meaning | This section applies to closely held companies only (private company)Lending money is not the business of the companyGiven below 3 cases would be deemed dividend to the extent of accumulated profits that are not capitalized. |
| Case 1: | A loan is given to equity holders holding, 10% or more of total voting power on the date of the loan given.Example: XYZ Pvt. ltd having accumulated profit of 10L out of which 3L are capitalized. Mr. A, a 12% holder, took a loan of 9L from the company. So, 7L will be considered as deemed dividend u/s 2(22)(e) |
| Case 2: | The loan is given to a concern or another entity in which the equity holder, holding 10% or more of total voting power in the closely held company, has a substantial interest in the concern or the entity, atleast 20% control.Example: XYZ Pvt. ltd having accumulated profit of 10L out of which 3L are capitalized. Mr. A, a 12% holder, is also having a partnership firm, AB and Co. XYZ Pvt ltd gives loans to AB and Co. of 7L. So, 7L will be considered as deemed dividend u/s 2(22)(e). |
| Case 3: | The loan is given to any individual for the benefit of the equity holder holding 10% or more of total voting power on the date of the loan given.Example: XYZ Pvt. ltd having accumulated profit of 10L out of which 3L are capitalized. Mr. A, 12% holder The company gives loans to Mrs. B of 4L for the benefit of Mr. A. So, 4L will be considered as deemed dividend u/s 2(22)(e). |
| Some Special Points | The repayment of such a loan will be irrelevant. If the person returns money in a reasonable time still that loan will be treated as deemed dividend.This section is applied even if companies charge market rates of interest.If the loan is given to more than one person so the amount of subsequent accumulated profit not capitalized is reduced.If the loan amount is adjusted against future payable amount as a dividend it is allowed. |
Income tax on Dividends
Case 1: Dividends distributed by Domestic Company
For Deemed dividend u/s 2(22)(a), 2(22)(b), 2(22)(c), 2(22)(d) Dividend received from domestic company is exempt u/s 10(34). As per 10(34), for any resident other than the company and other specified institutions: Dividend up to 10Lakh is exempt and rest is taxable u/s 115BBDA @10%.
For Companies and Specified institution: Full dividend is exempt
But Domestic Companies are liable to pay Additional Income tax or Dividend Distribution Tax or Corporate Dividend Tax (CDT) u/s 115-O.
As per section 115O, the rate is 15% which is applied to the total of dividend distributed and additional income tax. (Grossing Up) A surcharge of 12% and Heath Education Cess of 4% is added to the liability.
Example: The dividend paid to a resident individual by a domestic company is 50,000
| CDT (50,000 X 15%/85%) | 8823 |
| Add: Surcharge @12% (8823 X 12%) | 1059 |
| Add: Cess @4% ((8823+1059) X 4%) | 395 |
| Final Liability | 10277 |
So the Effective rate of additional tax on the amount of dividend paid would come out to be 20.5553%.
Read Also: Income Tax Rate For AY- 2020-2021/ FY- 2019-2020
For Deemed dividend u/s 2(22)(e)
Dividend received from a domestic company is exempt u/s 10(34).
As per 10(34), Loan/ Advance deemed as dividend u/s 2(22)(e) is exempt fully without any exceptions. As per section 115-O, the rate is 30% which is applied to the total of loan or advance is deemed under the section. (No Grossing up). A surcharge of 12% and Heath Education Cess of 4% is added to the liability.
Example: Loan/Advance to resident individual (holding 20% of share) by the domestic company is 50,000
| CDT (50,000 X 30%) | 15,000 |
| Add: Surcharge@12% (15,000 X 12%) | 1,800 |
| Add: Cess@4% ((15,000+10,800) X 4%) | 672 |
| Final Liability | 17472 |
So Effective rate of additional tax on the amount of loan/ advance paid would come out to be 34.944%
Read Also: Income tax on shares and securities in India
Case 2: Dividends distributed by Foreign Company
Foreign Companies are not liable to pay additional income tax or dividend distribution tax as section 115-O does not apply to foreign companies.
Dividend received from a foreign company is fully taxable under the head “Income from other sources” as normal income.
Section 10(34) does not apply to the dividend received from a foreign company.
ILLUSTRATION: Lets find out tax liability for AY-2020-21 in the following cases-
| Particular | Mr.X (40yrs) | Mr.Y (40yrs) | Z & Co (firm) | A Ltd. |
| Business Income | 35L | 25L | 15L | 20L |
| Dividend from Domestic Company | 12L | 9.6L | 30L | 50L |
| Dividend from foreign Company | 5L | 15L | 25L | 20L |
Computation of Income tax on dividend income in India
| Particular | Mr.X | Mr.Y | Z & Co. | A Ltd. |
| Dividend Income (Domestic Company) | 12L | 9.6L | 30L | 50L |
| Less: Exemption u/s 10(34) | (10L) | (9.6L) | (10L) | (50L) |
| Taxable Domestic Dividend | 2L | 0 | 20L | 0 |
| Foreign Dividend | 5L | 15L | 25L | 20L |
| Business Income | 35L | 25L | 15L | 20L |
| Total Income | 42L | 40L | 60L | 40L |
| Tax on domestic Dividend @10% | 20,000 | 0 | 2,00,000 | 0 |
| Tax on rest income | 10,12,500 | 10,12,500 | 12,00,000 | 12,00,000 |
| Add: HEC@4% | 41,300 | 40,500 | 56,000 | 48,000 |
| Tax Liability | 10,73,800 | 10,53,000 | 14,56,000 | 12,48,000 |
Read Also: TDS and TCS Rates Chart – Examples of how to calculate TDS for FY 2020-21
The author of the above article is Aditya Kishore.
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