Dividend is the amount declared by the board of directors of a company, which is paid to its shareholders out of the current profits or retained earnings. In simple words, Dividend means profits shared by the company with its shareholders.
Dividends received by a shareholder in India can be divided into three parts:
Ø Dividends received from a domestic company.
Ø Dividends received from a foreign company.
Ø Divided or any other income from mutual fund.
Taxability of Dividend Income received from Domestic Company
Under section 10(34) of Income Tax Act, 1961, Dividend referred to in section 115-O is exempt from tax in hands of shareholder. Any amount declared or paid by a domestic company is respect of dividend is exempt from Income Tax.
In India, Dividend Distribution Tax (DDT or CDT) is payable, by domestic company in addition to income tax under section 115-O(1) of the Income Tax Act. Any amount declared, distributed or paid in respect of dividends (whether interim or otherwise), whether out of current profits or retained earnings, shall be charged to additional income tax at an effective rate of 20.36% on gross basis.
Furthermore, Budget 2016 has amended the Income Tax Act, where any dividend income in the hands of shareholders being Individuals/HUF/Firms exceeds Rs.10,00,000, then such dividend shall be charged to tax at 10% under Section 115BBDA. This results in taxing the same amount thrice.
Mr. Khanna received a dividend of Rs 14 lakhs from domestic companies during the year. Since the dividend income received by Mr. Khanna exceeds Rs 10 lakhs, therefore, he will be liable to pay tax at 10% on dividend amount in excess of Rs 10 lakhs. Thus, the tax payable will be Rs.40,000 i.e. Rs. 4 Lakhs x 10%.
Taxability of Dividend Income received from Foreign Company
Dividend received by a resident taxpayer from a foreign company will be taxable under “Income from Other Sources”. The taxpayer will be charged as per income tax rates applicable to him.
Where, any dividend has been received by an Indian company from a foreign company, it will be taxed under “Income from Other Sources”. The taxpayer will be charged as per income tax rates applicable for companies.
Benefit of DTAA (Double Taxation avoidance agreement) -Where the dividend has been received from a foreign company, it is charged to tax in India as well in the country foreign country belongs. However, if such foreign dividend is taxed in both the countries, then the taxpayer can claim the relief of double taxation to avoid doubly taxing the same income. In case there is a double taxation avoidance agreement (DTAA) between India and the foreign country (from which the foreign company is) relief can be claimed under section 90 and where there is no DTAA, then relief can be claimed under section 91.
Divided income from mutual fund
Income from units of a mutual fund is exempt under section 10(35). Therefore, any income generated by the mutual fund through investments, either in the form of capital gains (Upto Rs. 1,00,000), dividends or interest is exempt from income tax. Capital gains over and above Rs. 1,00,000 will be taxed at 10% from April 1 2018 onwards.
Time Limit for the Payment of Dividend Distribution Tax (DDT or CDT)
Dividend Distribution Tax (DDT or CDT) shall be paid within 14 days from the date of: –
a) declaration; or
b) distribution; or
c) payment, of any dividend whichever is earliest.
Note: Dividend includes deemed dividend under section 2(22) (a), (b), (c) & (d) except dividend u/s 2(22) (e).