Taxation of Dividend Income – Recipient & Payer
– CA Naresh Jakhotia
Dividend income has always subject to change from time to time. Long back, it was eligible for deduction u/s 80L and after that it was granted complete exemption under section 10. Dividend Distribution Tax (DDT) is introduced to compensate the loss of revenue for giving tax free status to Dividend income.
Now, tax on dividend is back. However, it is reintroduced only if dividend is received by individual/HUF/firms. AOP/BOI/Trust etc would continue to enjoy the exemption status.
Key provision with regards to Dividend in Income Tax Act-1961 is highlighted as under:
- Dividend Distribution tax of 10% on distributed income by equity-oriented mutual funds has been introduced
- Dividend taxation is summarized as under.
|Dividend Received from||Taxable at the Rate of||Relevant section|
|-if aggregate dividend income received during the year is less than Rs. 10 lakh||Nil||Section 10(34)|
|-if aggregate dividend income received during the year is more than Rs. 10 lakh||10%||Section 115BBDA|
|Foreign Company||As per the marginal tax rate applicable to the tax payer||Section 115BBD|
|Debt Mutual Fund||Nil||Section 10(35)|
|Equity Mutual Fund||Nil||Section 10(35)|
Let us discuss more about it/
Dividend from a domestic company
Under section 10(34, any income received by an individual/HUF as dividend from an Indian company is exempt from tax as the company declaring such dividend has to pay Dividend Distribution Tax (DDT) before paying the dividend. By FA-2016, Section 115BBDA is introduced. As a result, if aggregate dividend received by an individual/HUF from companies exceeds Rs. 10,00,000 then it is taxable @ 10% on dividend income received in excess of Rs. 10 lakh.
Section 115BBDA applies only on dividend income received from domestic companies under Section 10(34) and excludes dividend income received from mutual funds under Section 10(35).
It means that if a person is earning dividend income of Rs. 12 Lakh, tax would be payable on Rs. 2 Lakh only i.e., Tax of Rs. 20,000/-
Dividend income received from a foreign company
Under Section 115BBD of Income Tax Act – 1961, dividend received by an individual/HUF from a foreign company is fully taxable under “Income from other sources”.
The dividend received is includible in the total income of the recipient taxpayer and will be charged according to the income tax rate slabs applicable to the taxpayer.
Dividend income received from debt and equity mutual funds
Dividend income received from mutual fund is covered by section 10(35) and not 10(34).
Under Section 10(35) of Income Tax Act – 1961, any income received by an individual/HUF as dividend from a debt mutual fund scheme or an equity mutual fund scheme is fully exempt from tax.
Divided is not to be viewed from the angel of the recipient but also to be viewed from the angel of the payer company.
In addition to tax in the hand of investors as already discussed above, dividends declared by domestic companies also attract a Dividend Distribution Tax (DDT).
DDT varies & depends upon the type of entity declaring the dividend.
|Nature of paying company||DDT for Individuals/HUFs||Relevant section under Income Tax Act|
|Domestic companies||17.304% (including 12% surcharge and 3% education cess)||Section 115-O|
|Equity mutual funds||10%||Section 115-R|
|Debt mutual funds (including liquid mutual funds)||At the rate of 28.84% (including surcharge and cess)||Section 115-R|
Let us discuss about it more.
Dividend distributed by a domestic company
Under Section 115-O of IT Act- 1961, domestic companies declaring dividends are liable to pay DDT before crediting the dividend in the account of its shareholders.
The rate of DDT varies by type of entity declaring the dividend. A domestic company has to pay DDT of 15 % + 12% surcharge + 4% education cess.
Dividend distributed by a foreign company
A foreign company is exempted from DDT on dividend paid to its shareholders.
The tax implication in the hands of mutual fund is different for debt fund and different for equity fund.
Dividend distributed by debt mutual funds
Dividend or income distributed on debt mutual funds is liable to DDT@ 28.60% (including surcharge and cess) for Individuals and HUF investors. DDT is deducted from dividend before the mutual fund credits dividend in the account of debt mutual fund holders.
Dividend distributed by equity mutual funds
Dividend or income distributed on equity mutual funds is taxed at 10% as per the FA- 2018