Taxability of Dividend.

Taxability of Dividend.

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Taxability of Dividend.

A very well known fact about taxability of dividend, for a layman, is that it is not taxable/ exempt. But here we will discuss about various tax implications on dividend.

  1. As per Section 10(34) any income by way of dividends, referred to under section 115-O, is excluded from the total income of the shareholder.
  2. Under section 115-O, any dividend declared, distributed or paid by a domestic company, whether out of current or accumulated profits, shall be charged to additional income-tax at a flat rate of 15% in addition to normal income-tax chargeable on the income of the company. This is known as corporate dividend tax or dividend distribution tax. This not leviable on deemed dividend under section 2(22) (e)...
  1. Dividends received from a company, other than a domestic company, is still liable to tax in the hands of the shareholder. For example, dividend received from a foreign company is liable to tax in the hands of the
  2. It may, however, be noted that the exemption available under section 10(34) would not  be  allowable in respect of dividend income chargeable to tax in accordance with the provisions of section 115BBDA, even if the dividend distribution tax is paid by the domestic company on such amount of
  3. As per Section 115BBDA any income by way of aggregate dividend in excess of Rs. 10,00,000 shall be chargeable to tax in case of specified assessee at the rate of 10% (only for residents). Specified assessee means:

A person other than

  • domestic company
  • a fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in section 10(23C)(iv)/(v)/(vi)/(via) a trust or institution registered under section 12A or 12AA

What is Dividend?

Dividend is defined under section 2(22) of the income tax act, 1961 and have further 5 clauses.

  • Distribution of accumulated profits, entailing the release of company’s assets – Any distribution of accumulated profits, whether capitalised or not, by a company to  its shareholders is dividend if it entails the release of all or any part of its assets.

For example, if accumulated profits are distributed in cash it is dividend in the hands of the shareholders. Where accumulated profits are distributed in kind, for example by delivery of shares etc. entailing the release of company’s assets, the market value of such shares on the date of such distribution is deemed dividend in the hands of the shareholder.

  • Distribution of debentures, deposit certificates to shareholders and bonus shares to preference shareholders – Any distribution to its shareholders by a company of debenture, debenture stock or deposit certificate in any form, whether with or without interest, and any distribution of bonus shares to preference shareholders to the extent to which the company possesses accumulated profits, whether capitalised or not, will be deemed as dividend.

The market value of such bonus shares is taxable in the hands of the preference shareholder. In the case of debentures, debenture stock etc., their value is to be taken at the market rate  and if there is no market rate they should be valued according to accepted principles of valuation.

Note: Bonus shares given to equity shareholders are not treated as dividend.

  • Distribution on liquidation – Any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not, is deemed to be dividend income.

Note: Any distribution made out of the profits of the company after the date of the liquidation cannot amount to dividend. It is a repayment towards capital.

Accumulated profits include all profits of the company up to the date of liquidation whether capitalized or not. But where liquidation is consequent to the compulsory acquisition of an undertaking by the Government or by any corporation owned or controlled by the Government, the accumulated profits do not include any profits of the company prior to the 3 successive previous years immediately proceeding the previous year in which such acquisition took place subject to certain exceptions.

  • Distribution on reduction of capital – Any distribution to its shareholders by a company on the reduction of its capital to the extent to which the company possessed accumulated profits, whether capitalised or not, shall be deemed to be dividend.
  • Advance or loan by a closely held company to its shareholder – Any payment by a company in which the public are not substantially interested of any sum by way of advance or loan to any shareholder who is the beneficial owner of 10% or more of the equity capital of the company will be deemed to be dividend to the extent of the accumulated profits. If the loan is not covered by the accumulated profits, it is not deemed to be dividend.

Also, any payments by such a closely held company on behalf of, or for the individual benefit   of any such shareholder will also deem to be dividend. However, in both cases the ceiling limit of dividend is the extent of accumulated profits.

Exception: If the loan is granted in the ordinary course of its business and lending of money is a substantial part of the company’s business, the loan or advance to a shareholder or to the specified concern is not deemed to be dividend. Where a loan had been treated as dividend and subsequently the company declares and distributes dividend to all its shareholders including the borrowing shareholder, and the dividend so paid is set off by the company against the previous borrowing, the adjusted amount will not be again treated as a dividend.

REMEMBER the provision of section 115BBDA os not applicable on Deemed dividend u/s 2(22)(e).

 

 


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