Taxation of Dividend

lipped from: https://taxguru.in/income-tax/taxation-dividend-2.html

Income Tax Department
Ministry of Finance, Government of India

Introduction

Dividend income is taxable in the hands of the recipient under the head ‘Income from Other Sources’. Its tax treatment depends on the residential status of the recipient and the type of security from which the dividend arises (e.g., shares, mutual funds, GDRs, AIFs, REITs/InVITs).

Meaning and Scope of Dividend

Meaning and Scope of Dividend

Dividend refers to the distribution of a company’s profits to shareholders. The Income-tax Act also includes the following as deemed dividends under Section 2(22) :

a. Distribution involving the release of assets

b. Debenture or deposit certificate distribution

c. shares to preference shareholders

d. Liquidation-related distributions

e. Distribution on capital reduction

f. Loans/advances to specified shareholders or concerns

g. Payment for buy-back of shares

Exclusions from Dividend

Exclusions from Dividend

The following are not treated as dividend:

a. Bonus shares to equity shareholders

b. Certain liquidation payments

c. Loans/advances in the ordinary course of business by companies engaged in money lending

d. Distribution of shares received under demerger

e. Loans/advances by IFSC-based finance company/units to its group entity or vice-versa, meeting prescribed conditions

Point of Taxation

Point of Taxation

As per Section 8 and ICDS-IV, dividend income is taxed in the year it is declared, paid, or distributed. The interim dividend is taxable in the year it is unconditionally made available.

Taxability Based on Type of Security

(a) Dividend from Shares

• Resident Shareholder: Taxable at applicable slab rates; deduction allowed for interest up to 20% of dividend income; no other deductions. No deduction is allowed for any expenses (including interest) in the case of deemed dividend under Section 2(22)(f)
• Non-Resident Shareholder: Taxed at special rates (5%–15%) as per DTAA; no deduction allowed; Chapter VIA deductions not permitted.

(b) Dividend from Mutual Funds

• Resident Unit-holder: Taxable at applicable slab rates; deduction allowed for interest up to 20% of dividend income; no other deductions.
• Non-Resident Unit-holder: Taxed at special rates as per DTAA; no deduction allowed; Chapter VIA deductions not permitted.

(c) Dividend from GDRs

• Non-residents: 10% concessional rate under Section 115AC; no deduction allowed; Chapter VIA deductions not permitted.
• Employees of eligible Indian companies: 10% concessional rate under Section 115ACA; no deduction allowed; Chapter VIA deductions not permitted.
• Residents (other cases): Taxed at normal rates with limited deductions; deduction allowed for interest up to 20% of dividend income; no other deductions.
• Non-residents (other cases): Special rates under DTAA; no deductions.

(d) Dividend from REITs/InVITs

• Dividend from SPV (opted for Section 115BAA): Taxable in the hands of unit holders.
  • Resident Unit-holder: Taxable at slab rates; deduction allowed for interest up to 20% of dividend income; no other deductions.
  • Non-Resident Unit-holder: Taxed at special rates as per DTAA; no deduction allowed.
• Dividend from SPV (not opted for 115BAA): Exempt in the hands of unit holders under Section 10(23FD).
• Dividend received (other than SPV) by REITs/InVITs: Taxable in the hands of REITs/InVITs and Exempt in the hands of unit holders under Section 10(23FD).

(e) Dividend from AIFs

• Category I & II AIF: Pass-through status under Section 115UB; taxable in the hands of unit-holders as if earned directly.
• Category III AIF: No pass-through; taxed at AIF level and again in the hands of unit-holders.
• Category III AIF Located in IFSC: Certain incomes are exempt under Section 10(4D); if not exempt, concessional rates under Section 115AD apply and distributed income is exempt under Section 10(23FBC).

(f) Special tax rates applicable for non-resident assessee

Special tax rates applicable for non-resident assessee

Special tax rates applicable for non-resident assessee
Section	Nature	Rate of Tax
115AB / 115AC / 115ACA	Dividend income in respect of units purchased in foreign currency/dividend received on GDRs of an Indian Company or PSU purchased in foreign currency/dividend distributed by an Indian company to its resident employee in respect of GDRs purchased in foreign currency	10%
115AD	Dividend income of FPIs from securities/Specified fund	10%/20%
115E	Dividend received in respect of a foreign exchange asset	20%
115A	Dividend received by a non-resident (other than referred to above)	10% if received from the IFSC unit, otherwise 20%

(g) Inter-corporate Dividend

To prevent cascading tax, a domestic company can claim a deduction under section 80M if it receives dividends from another domestic or foreign company or business trust and redistributes them to shareholders at least one month before the return filing due date.

(h) Exemptions for dividend income

The following exemptions are available under the Income-tax Act in respect of dividend income:

Exemptions available under the Income-tax Act in respect of dividend income
Section	Nature of Income
Section 10(23BBB)	Dividend income of the European Economic Community
Section 10(23FBC)	Dividend income received by a unitholder of Category III AIF
Section 10(23FC)	Dividend income of a Business Trust
Section 10(23FD)	Distributed dividend income of a Unit Holder from the Business Trust
Section 10(23FE)	Dividend income of a wholly owned subsidiary of the Abu Dhabi Investment Authority, a Sovereign wealth fund or a Pension fund
Section 10(26)	Dividend income of a member of a Scheduled Tribe
Section 10(26AAA)	Dividend income of a Sikkimese individual
Section 10(34B)	Dividend income of an IFSC unit engaged in the aircraft or ship leasing business from a company which is also an IFSC Unit engaged in the aircraft or ship leasing business