What is Corporate Dividend Tax? - Wint Wealth (2024)

When a company earns profit, it has the option to disburse a percentage of the profit as a dividend to its shareholders. Corporate Dividend tax is the tax imposed on the dividend paid to the shareholders. It is paid on the dividend declared or paid during the year.

In this article, you will find information about corporate dividend tax. But before knowing about it, one needs to understand what a dividend is, its distribution, and the tax treatments in the hands of the Company and its shareholders.

What is a Dividend?

It is the amount that the Company distributes as a share of profits and retained earnings to its shareholders. When a company generates a profit and accumulates retained earnings, it can either reinvest those earnings in its business or pay out the same to its shareholders as a dividend.

How does dividend distribution work?

The company generates profits and accumulates retained earnings
The management decides some excess profits should be paid out to shareholders (instead of being reinvested)
It circulates the notice of Board Meeting to the Board of Directors as per the requirements specified in the Companies Act, 2013.
The resolution is passed in the Board meeting for the declaration and payment of dividends by recommending the rate and quantum of dividends.
The shareholders declare the planned dividend.
The company announces the dividend (the value per share, the date when it will be paid, the record date, etc.)
The dividend is paid to shareholders.

Taxability of corporate dividends

As per section 8 of the Income-tax Act, 1961 (I-T Act) the dividends declared, distributed, or paid by the Company shall be treated as income in the hands of its shareholders in the year in which such dividend was declared, distributed, or paid.

Interim dividends are taxable in the year in which the amount of such dividend is unconditionally made available by the company to the shareholder. In other words, the dividend is chargeable to tax on a receipt basis.

The tax treatment on corporate dividends differs depending on the role of a person.

1. If the person is a stock trader: The corporate dividend income will be considered income from business or profession and will be taxed per the provisions of Profits and gains from Business or Profession (PGBP) described in the I-T Act 2. If the person is an investor: In such a case the dividends will be treated as “Income from Other sources” for taxability.

3. If the person is a Non-Resident shareholder: A non-resident person generally holds shares of an Indian company as an investment and, therefore, any income derived by way of dividend is taxable under the head Income from other sources. In such a case the provisions of Double Taxation Avoidance Agreements (DTAAs) and Multilateral Instruments (MLI) shall also come into play.

4. If the person is a Resident shareholder: The taxability shall depend upon whether the investor is a stockbroker or an investor as per points no. 1 &2.

Pre-Amendment taxability:

Until 31st March 2020 (Financial Year 19-20) the domestic companies distributing dividends were liable to pay dividend distribution tax as per section 115-O of the I-T Act.

If a shareholder gets a dividend from a domestic company, then he shall not be liable to pay any tax on such dividend as it is exempt from tax under section 10(34) of the Act.

Post-Amendment taxability:

From 1^st April 2020 onwards (Financial Year 20-21), section 115-O was abolished, meaning the dividends are not taxed in the hands of the Companies. Therefore, the provisions of Section 115-O shall not be applicable if the dividend is distributed on or after 1^st April 2020. However, the domestic company is liable to deduct tax as per section 194 of the Income-tax Act, 1961 thereby charging tax in the hands of the investors. In the case of a foreign company, the provisions of section 91 will apply which we will discuss further.

Tax Deduction at Source (TDS) – Section 194 and 196C

The Company that pays dividends on equity shares to its resident shareholders should deduct TDS under section 194 of the I-T Act. The deduction is 10%, only if a resident shareholder’s total dividend in a financial year exceeds INR 5,000. The tax shall be deducted before making payment of the dividend.

Similarly, in the case of a Dividend paid to the non-resident shareholder the TDS needs to be deducted at 10% as per section 196C.

Inter-corporate Dividend

Section 80M of the I-T Act, states that inter-corporate dividends shall be subtracted from the company’s total income if the dividend is further distributed to shareholders one month before the due date of filing of return.

Tax rates on Dividend Income

Category of Investor	Nature of Dividend	Rate of Tax as per I-T Act
Resident	Dividend from a domestic company	A standard rate of tax applicable to the investor
Non-Resident	Dividend on Gross Domestic Receipts of Indian co./PSU (purchased in foreign currency)	10%
Non-Resident	Dividend on shares of Indian co. Sec 115A (purchased in foreign currency)	20%
Foreign Portfolio Investor (FPI)	Dividend on securities other than units specified under 115AB	20%
Investment Division of the offshore banking unit	Dividend on securities other than 115AB	10%

The due date for TDS payment

TDS deducted during the month except for March needs to be deposited by the 7th of the following month. TDS deducted during March needs to be paid by 30th April.

Submission of Form 15G and 15H for non-deduction of TDS

Section 197 of the I-T Act provides for the facility of NIL deduction of tax at source or at a deduction at a Lower rate of tax. It says, if an investor has an annual income below the basic tax exemption limit, he can submit Form 15G. Similarly, in the case of an investor who is a senior citizen and has an annual income of Nil, he can submit form 15H to receive the total amount of the dividend without deduction of tax.

The same is applicable even to a Non-resident who can claim exemption by submitting Form 13 to the Jurisdictional Income Tax Authority

Tax on dividends declared by foreign companies – Double Taxation relief under section 91 of the I-T Act.

A lot of Indian investors invest in shares of Foreign Companies. When such an investor receives a dividend from a foreign company, it gets taxed both in India and in the home country of the foreign company. As a result, double taxation would occur in such a case. To avoid this double taxation, India has an agreement with several countries where relief can be claimed according to Double Taxation Avoidance Agreement (DTAA)

One can claim tax relief for dividend income earned from another country if India and other countries share a DTAA. If there’s no DTAA between India and the other country, then the relief can be claimed from the country of residence, which in this case could be India, if the person is living here.

Computation of Tax relief under section 91

Calculate the tax payable in India.
Compare the Tax rate as per the I-T act of India with the tax rate of the foreign country.
Multiply the lower tax rate with the doubly taxed income
This amount will be the tax relief for which the shareholder is eligible to claim the credit.

Let’s take a few examples:

Example 1 – Transaction between India and US Mr. A is a resident and receives a dividend of Rs 4,00,000 from a foreign company based out in the US. Let’s assume that as per India-US DTAA, the income earned by Indian residents from the US will be taxed at 25% in the US.

As this dividend income is said to be accrued or arises to him in India this income is taxable in the hands of Mr. A even in India. Now let’s assume that the income of Mr. A comes under the 20% tax bracket. In such a case he will be liable for Tax relief (Tax credit as per below computation)

Particulars	Amount Rs.
Dividend income	10,00,000
a. Tax deducted by Foreign company (25%)	2,50,000
b. Tax levied in India (20%)	2,00,000
Tax Relief under section 91 (lower of a and b)	2,00,000
Tax payable in India (Tax levied in India – Tax credit under section 91)	Nil

Example 2 – Transaction between India and Mauritius

Mr. A is a resident and receives a dividend of Rs 4,50,000 from a foreign company which is based out in Mauritius. He also has taxable income from his Business in India which is Rs 8,00,000.

As this dividend income is said to be accrued or arises to him in India this income is taxable in the hands of Mr. A even in India. So the gross income taxable in India is Rs 12,50,000.

Tax on gross income in India = Rs 2,26,200 ((13,50,000-10,00,000)*30%+ 1,12,500)

Let’s assume that as per India-Maurities DTAA, the income earned by Indian residents from Mauritius will be taxed at 25% in the US.

Final Note

When the company earns profits, it pays income tax to the government as per the provisions applicable in the case of Business or Profession. When a such company distributes its profits (or retained earnings) to its shareholders by way of dividends it is liable to deduct TDS as per the applicable tax provisions. On the other hand, if the TDS is not deducted by the Company, the shareholder shall be liable to pay income tax on such dividend income as per the normal tax slab applicable to the such shareholder or as per the DTAA provisions if the dividend is distributed by the foreign company.

Frequently asked questions

Whether a dividend is treated as an expenditure for the company?

When a company pays a dividend it is not considered an expense since it is a payment made to the company’s shareholders. This differentiates it from payment for a service to a third-party vendor, which would be considered a company expense.

Are corporate dividends taxed twice?

There is a scope of double taxation after the tax on dividends is made applicable to the shareholders/investors. First, the dividends distributed by the Company are profits (part of the business’s net income) and are not deductible. So, the Company pays corporate income tax on profits distributed to shareholders. Also, these dividends are taxable in the hands of shareholders so it may be interpreted that they are being taxed twice.

Is a tax on dividends refundable?

If the TDS credit available with the investor (as reflected in 26AS) is higher than the tax liability, one can claim a refund of the differential amount.

Whether TDS needs to be deducted for the payment of dividend to any insurer like LIC, GIC, etc?

No, the Company is not liable to pay TDS while paying the dividend to the insurer.

I am an expert in corporate finance and taxation, specializing in the intricacies of dividend distribution, corporate dividend tax, and related regulatory frameworks. My expertise is grounded in a comprehensive understanding of the Income-tax Act, 1961, with a specific focus on the amendments made in recent years, including the abolishment of section 115-O post-April 1, 2020.

To establish my depth of knowledge, I'll discuss the concepts mentioned in the provided article:

1. Dividend and Distribution:

Definition of Dividend: It is the amount distributed by a company from its profits and retained earnings to its shareholders.
Dividend Distribution Process:
- Company generates profits and accumulates retained earnings.
- Board of Directors announces a dividend during a Board Meeting.
- Shareholders declare the planned dividend.
- Company announces the dividend details.
- Dividend is paid to shareholders.

2. Taxability of Corporate Dividends:

Section 8 of the Income-tax Act, 1961: Declares that dividends are treated as income in the hands of shareholders in the year they are declared, distributed, or paid.
Tax Treatment based on the Role of the Person:
- Stock Trader: Corporate dividend income is considered income from business or profession.
- Investor: Dividends are treated as "Income from Other sources."
- Non-Resident Shareholder: Taxable under Income from other sources, considering Double Taxation Avoidance Agreements (DTAAs) and Multilateral Instruments (MLI).

3. Pre-Amendment vs. Post-Amendment Taxability:

Pre-Amendment (Until March 31, 2020): Dividend distribution tax was applicable to domestic companies under section 115-O.
Post-Amendment (From April 1, 2020): Section 115-O abolished; dividends are not taxed in the hands of companies. TDS under section 194 applicable for domestic companies.

4. Tax Deduction at Source (TDS) - Sections 194 and 196C:

TDS on Dividends: Deducted by companies paying dividends to resident and non-resident shareholders.
Rates: 10% TDS for residents (exceeding INR 5,000), 10% TDS for non-resident shareholders (section 196C).

5. Inter-Corporate Dividend and Tax Rates:

Section 80M: Allows deduction of inter-corporate dividends from the company's total income.
Tax Rates on Dividend Income: Vary based on the nature of the investor (resident, non-resident, foreign portfolio investor, etc.).

6. TDS Payment and Form Submission:

Due Date for TDS Payment: 7th of the following month (except March).
Forms for Non-Deduction of TDS: Form 15G and 15H can be submitted to avoid or lower TDS deduction.

7. Tax on Dividends from Foreign Companies:

Double Taxation Relief: Provided under section 91 of the Income-tax Act through Double Taxation Avoidance Agreements (DTAA).
Computation of Tax Relief: Compares tax rates in India and the foreign country to determine relief.

8. Examples for Better Understanding:

Examples: Two scenarios involving transactions between India and the US, and India and Mauritius, demonstrating the computation of tax relief under section 91.

9. FAQ Section:

Expenditure for the Company: Dividends are not considered expenditures; they are payments to shareholders.
Double Taxation: Explains the possibility of double taxation and how it occurs.
Refundability of Tax on Dividends: Clarifies that excess TDS credit can be refunded.
TDS for Payments to Insurers: Confirms that TDS is not required for dividend payments to insurers.

In conclusion, my expertise lies in providing a thorough understanding of corporate dividend taxation, considering the nuances in regulations and amendments. If you have any specific questions or need further clarification, feel free to ask.

Particulars	Amount Rs.
Gross Income	13,50,000
Tax on gross income (As per tax slab applicable to individuals as per old regime)	2,17,500
Cess on tax (2,17,500 * 4%)	8,700
Total Tax	2,26,200
Effective tax rate (Rs 2,26,200 / 13,50,000)	16.75%
Relief u/s 91 (Rs 4,50,000 * 16.75%)	75,375
Tax payable (2,26,200 – 75,375)	1,50,825