Tax on dividend income received by individual/HUF/firms

Budget 2020 Tax Highlights

Main highlights from the budget presented by Hon’ble Finance Minister Ms. Nirmala Sitharaman on 1st Feb 2020.

  • Option to the taxpayer choose between old income tax rate and slabs and the new ones.
  • New tax slabs offer reduction in applicable tax rate from 20% to 10% and from 30% to 20% in some cases.
  • In case the tax payer opts for new slabs and rates, no exemption or deduction can be claimed such as those on account of house rent allowance (HRA) investments, LIC premium, school fees, mediclaim etc.
  • Dividend Distribution Tax has been withdrawn, and dividend income shall be taxable in the hands of the recipient.
  • The Insurance coverage of deposit in a bank has been increased from Rs. 1 lakh to 5 lakh.
  • The home loan interest exemption limit of Rs. 1.5 lakhs for home loans sanctioned on and before 31st March 2020 have been extended by 1 year to 31st March 2021.

Dividend income received from a domestic company

As per section 10(34) of Income Tax Act, any income received by an individual/HUF as dividend from an Indian company is exempt from tax as the company declaring such dividend has already deducted dividend distribution tax before paying the dividend.

However, under Section 115BBDA (as introduced in the Finance Act, 2016), if aggregate dividend received by an individual/HUF from companies exceeds Rs. 10,00,000, it is liable to pay tax at the rate of 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).

Illustration 1: Tax at the rate of 10% on dividend income received by Indian company under section 15BBDA

Mr. Mehta received Rs. 15 lakh as dividend from various Indian companies during the FY17-18. Since, his dividend income for the year exceeds Rs. 10 lakh; he is liable to pay tax at the rate of 10% on excess dividend income earned over Rs. 10 lakh. In this case, he is liable to pay a tax of 10 % on Rs. 5 lakh (dividend income in excess of Rs. 10 lakh), which translates into a tax liability of Rs. 50,000.

Dividend income received from a foreign company

As per Section 115BBD of Income Tax Act, dividend received by an individual/HUF from a foreign company is fully taxable under the head “Income from other sources”. The dividend received is included 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

As per section 10(35) of Income Tax Act, 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. In addition to tax in the hand of investors, dividends declared by domestic companies also attract a Dividend Distribution Tax (DDT). DDT varies by the type of entity declaring the dividend.

Type of entity declaring dividend Dividend distribution tax rate for Individuals/HUFs Relevant section of 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
Foreign companies Nil

Dividend Distribution Tax to be paid by the company

Dividend distributed by a domestic company

As per section 115-O, domestic companies declaring dividends are liable to pay dividend distribution tax before crediting the dividend in the account of its shareholders. The rate of dividend distribution tax varies by type of entity declaring the dividend. A domestic company has to pay the dividend distribution tax of 15 % plus a 12% surcharge and 3% education cess which translates into an effective tax rate of 17.304%.

Illustration 2: A company declared a dividend of Rs. 200 to its shareholders. The company is liable to pay a dividend distribution tax of 17.304%, which translates into a tax liability of Rs. 35. The company will have to deduct this tax before crediting the dividend to the account of its shareholders which in this case will be an amount of Rs. 165.

Dividend distributed by a foreign company

A foreign company is exempted from paying dividend distribution tax on dividend paid to its shareholders.

Dividend distributed by debt mutual funds

Dividend or income distributed on debt mutual funds is subject to a dividend distribution tax at the rate of 28.33% (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 latest budget 2018-19.

Our News - Feb 2020
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