Prior to the Finance Act, 2020, companies and mutual funds were liable to pay “Dividend Distribution Tax” on dividends declared or distributed. Therefore, Dividend income was exempted in the hands of shareholders. However, Finance Act, 2020 deleted the concept of Dividend Distribution tax and Tax on dividends income will be in the hands of shareholders for all the dividends paid or distributed by a Company on or after 1st April 2020.
At par with other provisions of the Income tax Act, Finance Act, 2020 imposed liability to deduct TDS on dividend Income distributed/paid to shareholders. Hence, the Company will have to deduct tax at source (TDS) on all the dividend paid or distributed to shareholders in accordance with provisions of Section 194 and section 195 of Income-tax Act 1961.
1. Companies to deduct TDS on dividend distributed (Section 194 of Income Tax Act)
As per section 194 of Income Tax Act, 1961, the Principal officer of an Indian Company or a Company declaring and making payment of the dividend within India is required to deduct TDS if the following conditions are satisfied :
- The dividend is paid to the shareholder residing in India; and
- Following nature of dividends are covered within the meaning of Clause (a) to (e) of Section 2(22):
- Dividend distributed by the company out of accumulated profits, if such distribution results in release of assets of the company (Section 2(22)(a))
- Distribution of debentures, debenture-stock or deposit certificate to shareholders or distribution of bonus to preference shareholders (Section 2(22)(b))
- Distribution by company to its shareholders at the time of liquidation (Section 2(22)(c))
- any distribution to its shareholders by a company on the reduction of its capital (Section 2(22)(d)
- Any payment made by closely held company (i.e., company in which public is not substantially interested) by way of advances or loans to:
- shareholders holding voting rights of not less than 10%; or
- Any concern in which such shareholder is a partner or member or having substantial interest.
This section also applies to the dividend paid on preference shares.
2. When to Deduct TDS on dividend i.e. Tax on Dividends
The Company is liable to deduct TDS on earlier of any of the following dates:
- Before making payment of Dividend (In cash or any other mode)
- Before making any payment or distribution to a shareholder
3. What are the Rate of TDS on Dividend Income
|Particulars||TDS Rate effective up to 13th May 2020||TDS rate after 13th May 2020 up to 31st March 2020|
|A resident shareholder who has furnished PAN||10 %||7.5%|
|Resident Shareholder who has not Furnished PAN||20 %||20%|
4. Cases where companies are not liable to deduct TDS on dividend distributed
In following cases of payment of dividend, the companies is not liable to deduct TDS:
- When the aggregate amount of dividend paid to an individual during the financial year is not more than Rs 5000. However, dividends should be paid by any mode other than cash.
- The dividend paid to following persons subject to submission of sufficient documents:
- Life Insurance Corporation of India; or
- General Insurance Corporation of India; or
- any other insurer for shares held by it and in which he has full beneficial interest.
- Where a declaration is filed by the resident shareholder in Form 15G (Applicable to any person other than the company or the firm) or 15H (applicable to an individual who is above age of 60 years).
- Mutual Funds subject to the submission of declaration that it is covered under section 10(23D) of Income Tax Act.
- Alternative Investment Fund (AIF) established or incorporated in India having an income that is exempt under section 10 (23FBA) of Income Tax Act and they are governed by SEBI regulations as Category I or Category II. AIF is required to submit a documentary proof to that effect.
- The corporation which is established by or under a Central Act which is, under any law for the time being in force has income exempt from Income Tax. Corporation is needed to submit necessary documents to substantiate that under which central act corporation covered.
- Other resident Non-Individual shareholders who are exempted from the provisions of TDS vide section 196 of the Income Tax Act 1961such as Government of India, Reserve Bank of India etc.
For claiming the exemption from TDS on Dividend, it is important to submit proper required documents along with a self-declaration to the company.
5. TDS on Dividend distributed to non-resident Shareholders
Section 195 of The Income Tax Act states that TDS on dividend paid to non-resident shareholders is to be deducted on “Rates in Force”. This is defined in Section 2(37A) which is as under :
“for the purposes of deduction of tax under section 194LBA or section 194LBB or section 194LBC or section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be.”
Thus the rate as prescribed in Finance Bill 2020 for TDS is 20% while a surcharge at the rate of 15% is also added.
So The TDS rates on dividends distributed to Non-Resident shareholders are as follows.
|Particulars||TDS (Dividend < Rs 50 Lakhs)||TDS (Dividend Between Rs 50 Lakhs and Rs. 1 Crore)||TDS (Dividend between Rs. 1 Crore and 10 Crore)||TDS (Dividend > Rs 10 Crore)|
|Non Resident Indian shareholder||20.80%(TDS-20%EC & SHEC- 4%Surcharge-NIL)||22.88%(TDS-20%EC & SHEC- 4%Surcharge-10%)||23.92%(TDS-20%EC & SHEC- 4%Surcharge-15%)||23.92%|
(TDS-20%EC & SHEC- 4%Surcharge-15%)
|Foreign Company||20.80%(TDS-20%EC & SHEC- 4%Surcharge-NIL)||20.80%(TDS-20%EC & SHEC- 4%Surcharge-NIL)||21.22%(TDS-20%EC & SHEC- 4%Surcharge-2%)||21.84%(TDS-20%EC & SHEC- 4%Surcharge-5%)|
5.1 Provisions of The Double Tax Avoidance Agreement (DTAA)
Applying the provisions of section 90 of The Income Tax Act 1961, a non-resident shareholder can opt for the provisions of DTAA between India and the country of tax residence of the shareholder. For the purpose of availing benefits of DTAA following documents needs to be provided by the nonresident shareholder :
- Self-attested copy of Permanent Account Number (PAN Card), if any allotted by the Indian Income Tax authorities;
- Self-attested copy of Tax Residency Certificate (TRC) obtained from the tax authorities of the country of which the shareholder is resident;
- Self-declaration in Form 10F, if all the details required in this form are
- Self-declaration by the non-resident payee containing such particulars/ confirmation as would be imperative to be governed by and/ or avail benefits, if any, under the applicable DTAA
It should be noted that all the above documents should be self-attested by the non-resident shareholder
5.2 Rate of TDS on Dividend paid to Foreign Institutional Investors and Foreign Portfolio Investors
In case of the dividend paid to Foreign Institutional Investors and Foreign Portfolio Investors TDS rate would be 20% (plus applicable surcharge and cess). DTAA provisions are not applicable here.
5.3 Rate of TDS on Dividend paid to persons located in notified jurisdictional area under section 94A(1) of Income Tax Act, 1961
The TDS rate would be 30% or at the Rates in Force for a shareholder who is a tax resident of a country or territory as notified u/s 94A(1)of the Income Tax Act 1961.
6. Lower rates/ NIL rate of TDS
For residents as well as Nonresident Shareholders who provide a certificate U/s 197 of Income Tax Act 1961 for lower/ NIL rate of TDS, such rate of TDS can be considered on the submission of proper documents.
7. Treatment of Multiple Accounts under a different category in DDT
There is a possibility that a shareholder holds multiple accounts under different status/categories using single PAN. E.g. A person having 5 DEMAT Accounts under the same PAN and dividend paid in 2 accounts are less than INR 5,000 each. However, the declared dividend exceeds INR 5,000 in other 3 accounts.
In such case, the highest rate of TDS applicable on any category/status shall apply to the entire holding. E.g., in given example, TDS @ 7.5% will be deducted on dividend declared in all 5 accounts despite dividend is received within exemption limit in 2 accounts.
Thus, the abolition of the Dividend Distribution Tax has turned the total scenario of taxation on dividends. Also, the compliance part for the Companies has increased considerably.