The dividend is the amount received to shareholders through an investor, individual, HUF, or company to hold a group of shares in the company or organisation. The company then distributes the profit amongst its shareholders; the shareholders’ amount is a dividend. The taxes imposed on the shareholders when the dividend amount is more than the set income tax slab is called the Dividend Distribution Tax. These taxes came into existence in 1997.
Later there were amendments done to this Act in 2017. According to the Dividend Distribution Tax Act amendments, if the income from the dividend wealth exceeds 10,00,000 INR, then 10% of the exceeded amount, then the individuals, HUF, and firms are liable to pay Dividend Distribution Tax or DDT to the government of India. In recent times, the Finance Act, 2020, brought to an end Dividend Distribution Tax or DDT and restored the classical taxation system on dividends, i.e., in the shareholders' hands.
What is the classical system of taxation on dividends?
In 2020, the Finance Act again brought the classical taxation system on dividends that came into existence and applicable from 1st April 2020. Following amendments have been made on dividend income taxation to reduce the tax burden on the shareholders - individuals, HUF, and firms:
- The Income Tax Act, 1961 of section 57, states that the interest expense to receive the companies' dividend income would be liable to the tax deduction. Up to the greatest extent of 20% of such revenue sources can be levied on the shareholders.
- Introduction to a new section - 80M of the Income Tax Act to do away with the surging outcome of tax on corporate shareholders'.
- After the abolishment and further amendments in the Dividend Distribution Tax, the dividend will be taxed in the hands of investor or shareholder, regardless of the dividend's considerable (i.e., INR 10,00,000 limits has become superfluous).
- The company or the organisation distributing the dividend or its shareholders' profit must deduct tax at source (TDS). Imposing of TDS is done if the dividend amount paid to the shareholders or investors exceeds INR 5,000 per shareholder or investor. If the shareholders or the recipients are Indian residents, the company must deduce the TDS tax at a 10% rate. If the shareholders or the recipients are non-residents, the company must impose the TDS tax at a 20% rate.
Classic Dividend Taxation in the hands of Indian residents shareholders
As per the classic dividend taxation Act, the domestic or Indian companies shall be liable to withhold taxes at the rate of 10% on distributing the dividend or the profit amongst its non-resident shareholders. Although the rates may vary based on the type of shareholders – individuals or companies.
- For Individuals – If the shareholders are individuals, the dividend income shall be taxable as per the applicable income tax slab. Additionally, under the section of 115BBDA of the Income Tax Act, India's government has eradicated an additional tax of 10% on dividend income exceeding 10,00,000 INR per year for resident non-corporate individuals.
- For Companies – If the shareholders are companies, the dividend income shall be taxable as per the applicable income tax slab. The tax rate can oscillate somewhere between 25.17% to 34.94% and will include other deductions, such as surcharge and health and education cess.
Classic Dividend Taxation in the hands of non-residents shareholders
As per the classic dividend taxation Act, the domestic or Indian companies shall be liable to suppress taxes at the rate of 20% on distributing the dividend or the profit amongst its non-resident or foreign shareholders. Non-resident shareholders can claim the benefit of the lower tax rate under the applicable tax treaty, provided they are 'beneficial owners' of the dividend income. The various tax treaties provide a lower tax rate, and the tax rate can oscillate somewhere between 5% and 15%.
How is the Dividend Income Tax Calculated?
After amendments to the Income Tax, there was an exemption to shareholders from the dividend income tax, whereas the dividend distributor companies are supposed to pay the dividend tax. When the companies declare the dividend amount, they must pay the dividend income tax at 15%. This tax is deducted and set on the shareholding company to exempt the tax on the dividend received in the shareholders' hands.
- Thus, if the shareholding or dividend distributing company declares 4,00,000 INR as a dividend amount, then the dividend distribution tax amount would be 15% of 4,00,000, 56,000 INR. Therefore, the investor or shareholder would receive 3,44,000 INR.
- As a result, the dividend distribution tax’s effective rate concerning the investor or the shareholder is (56,000/3,44,000)*100 = 16.279%.
- You can even calculate the dividend distribution tax amount based on the amount received by the investor or the shareholder, i.e., 3,44,000 INR *1 6.279% = 56,000 INR.
Who is supposed to pay the Dividend Distribution Tax or DDT in India?
- The company must pay dividend Distribution Tax or DDT before producing or distributing the dividend amount.
- After amendments in the Tax Act, the shareholders will receive the dividend amount after deducting the DDT, making their hands a tax-free amount or income source.
- The domestic companies must pay at the rate of 15% as a dividend distribution tax. However, if the shareholder or the investor receives more than 10,00,000 INR as dividend income, he will be liable to pay tax at 10% and health and education cess of 4%.
When and who should go for a dividend scheme of different companies?
- The dividend scheme involves a high tax rate, and if you are an investor or a shareholder looking for a regular income source, you may invest in the dividend scheme.
- If you want to opt for dividends, you have to look through the future prospective and nearest future goals.
- If your future goal is to accumulate and collect the wealth, then the dividend scheme will blow up your collected profits and savings.
- Apart from the accumulated savings and profits, the compounding benefit will also be lost when you receive the dividend amount. The whole intent of the savings collection and wealth creation would be of no use.
So, you must have insight into Dividend Income Tax and its amendments and various income tax slab rates from the above read. Given the above details and information, it is crucial to keep an eye on the dividend received in a year. It will be beneficial while factoring in the taxable income and determining the payable advance tax for a financial year.
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Q. What is the rate of Dividend Distribution Tax in India?
Ans. There are different tax slab rates for companies, residents individuals, non-residential individuals. As per section 115-O of the Income Tax Act, the company is liable to pay the Dividend Distribution Tax at the rate of 15% of the declared dividend amount. As per Income tax section 80c, if the residential individual's dividend income exceeds 1,00,000 INR, they will be liable to pay the Dividend Distribution Tax at the rate of 10% of the exceeded dividend amount. The non-residential individual's dividend income exceeds the defined dividend income slab. They will be liable to pay the Dividend Distribution Tax at the rate of 20% of the exceeded dividend amount.
Q. How to calculate the Dividend Income Tax amount for a company?
Ans. Calculate the Dividend Income Tax using the mentioned formula:
Dividend Income Tax amount = (tax slab rate* declared dividend amount of the company)/100
For instance, if a company has announced its total dividend amount to be 2,00,00 INR if the company fall under 15% tax slab rate and it has declared the dividend amount as 2,00,000 INR, then the Dividend Income Tax amount would be - (15% * 2,00,000 INR)/100 = 30,000 INR. So, the dividend distribution tax would be 30,000 INR.