Dividend Income Under the Income-tax Act

Introduction:

Dividend is a share of a company's profits & retained earnings distributed to shareholders. When a company earns profit, it can choose either to reinvest earnings for future growth or pay dividends to shareholders. Generally, the decision is proposed by the board of directors and approved by Shareholders considering financial performance, cash flow, and future plan.

Dividends are not Expenses

It's a distribution of profits it's not classified as an expense and no deduction from income allowed.

Dividends & Income Tax

Dividend, commonly associated with the distribution of profits by a company to its shareholders, takes on a broader definition under Section 2(22) of the Income-tax Act in India.

I. Definition of Dividend [U/s 2(22)]:

The Income-tax Act expands the scope of dividend to include the following situations:
(a) Distribution of Accumulated Profits:

• Any distribution of accumulated profits by a company to its shareholders, whether in cash or in kind, is deemed as dividend. In the case of in-kind distribution, the market value of the assets released is considered as dividend.

(b) Distribution of Debentures, Deposit Certificates, and Bonus Shares:

• Distribution of debentures, deposit certificates, or bonus shares by a company to its shareholders is treated as dividend to the extent of the company's accumulated profits. The market value of bonus shares is deemed as dividend in the hands of preference shareholders.

(c) Distribution on Liquidation:

• Any distribution to shareholders during a company's liquidation/ closing, attributable to accumulated profits before liquidation, is deemed as dividend.

(d) Distribution on Reduction of Capital:

• Distribution to shareholders by a company on the diminution /reduction of its capital, to the extent of accumulated profits, is treated as dividend.

(e) Loan or Advance by a Closely Held Company:

• Any loan or advance by a closely held company to a shareholder, beneficially owning 10% or more of the voting power, is deemed as dividend to the extent of accumulated profits. The same applies to loans or advances to specified concerns in which a qualifying shareholder has a substantial interest.

Loans granted in the ordinary course of business, forming a substantial part of the company's business, are not deemed as dividend. - Repayment of a loan or charge of interest at market rate does not alter the applicability of Section 2(22)(e).
Other Exceptions: - Distribution in respect of non-participating shares issued for full cash consideration. - Payment on buyback of shares in accordance with Section 77A of the Companies Act, 1956. - Distribution of shares on demerger by the resulting company.

II. Basis of Charge of Dividend [Section 8]:

• Dividend declared at the annual general meeting is considered the income of the shareholder in the year of declaration.
• Deemed dividends under Section 2(22)(a) to (d) are treated as income in the year of distribution.
• Advance or loan deemed as dividend under Section 2(22)(e) is considered income in the year of payment.

III. Head of Dividend Income [Section 56(2)(i)]:

• Dividend income is taxable under the head "Income from other sources." However, shares held for trading purposes may be taxed under the head "Profits and gains of business or profession."

IV. Tax on Dividend Income:

• Dividend income received by a resident from a company, whether domestic or foreign, is taxable at normal rates of tax.
• The tax rates on dividend income for various categories of assesses, including non-resident persons, foreign portfolio investors (FPIs), non-resident Indian citizens (NRIs), and investment divisions of offshore banking units, are outlined under different sections of the Income-tax Act. Here's a summary of the relevant sections and tax rates:

Section	Assessee	Particulars	Tax Rate
115AC	Non-resident	Dividend on GDRs of an Indian Company or PSU purchased in foreign currency	10%
115AD	Foreign Portfolio Investor (FPI)	Dividend income from securities (other than units referred to in section 115AB)	20%
115AD	Investment division of an offshore banking unit	Dividend income from securities (other than units referred to in section 115AB)	10%
115E	Non-resident Indian	Dividend income from shares of an Indian company purchased in foreign currency	20%
115A	Non-resident or foreign company	Dividend income in any other case	20%

V- Relevant Circular

Clarification regarding trade advance not to be treated as deemed dividend under section 2(22)(e) – [Circular No. 19/2017, dated 12.06.2017]

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