All about Dividend Income, Payment and Compliances

Dividend income, payment, and reporting have undergone significant changes in the previous and current fiscal years, with recipients facing increased taxation and reporting requirements. Most people now prefer to invest in stocks and securities, and as a result, many people receive dividend income. Furthermore, because many companies pay dividends, disclosing and other regulatory standards pertaining to dividend payments are important for them as well.

Dividend taxation in the hands of shareholders 

One of the most significant changes in dividend taxation is the enhanced taxation of dividend income in the hands of shareholders. Section 10(34) exempts dividends beginning in the fiscal year 2020-21. Tax revenue has been entirely revoked.

Previously, domestic companies were required to contribute dividend distribution tax (DDT) on dividend payments, but DDT is no longer required as of April 1, 2020. As a result, if the dividend is distributed on or after 01-04-2020, domestic companies will not be required to pay DDT, while shareholders will be required to pay tax on such dividends.

Furthermore, section 115BBDA, which provided for the taxability of dividends in excess of Rs 10 lakhs, has been repealed, implying that the complete dividend income received by a person is now taxable in the hands of the shareholder. The aforementioned changes have increased the tax liability of dividend income for shareholders, but companies do not have to pay DDT on dividend distribution, lowering their dividend cost. 

Dividend payments are subject to TDS

According to Section 194, which applies to dividends distributed, declared, or paid on or after 01-04-2020, an Indian company must deduct tax at a rate of 10% from dividends distributed to resident shareholders if the total amount of dividend distributed or paid to a shareholder during the fiscal year exceeds Rs. 5,000.

TDS, however, shall not be deducted from the dividend income of a LIC, GIC, or any other insurer in respect of any shares owned by it or in which it has a full beneficial interest.

TDS will also be levied on dividends paid or distributed to non-residents under section 195 of the IT Act and the Double Taxation Avoidance Agreement (DTAA) with the country of residence.

Non-resident shareholders’ taxability and tax rate

A non-resident generally holds shares of an Indian company as an investment, and thus any income derived by way of dividend is taxable under the head of other sources unless such income is attributable to the non-Permanent resident’s Establishment (PE) in India.

Dividend income in the hands of a non-resident (including FPIs and non-resident Indian citizens (NRIs) is taxable at a rate of 20% under Section 115A of the Act, with no deduction under the Income-tax Act. However, if the DTAA provides for a beneficial dividend rate, that rate can be applied subject to the DTAA’s conditions and the provision of TRC, among other things. When a dividend is received in respect of GDRs of an Indian company or a Public Sector Undertaking (PSU) purchased in foreign currency, a 10% tax is levied. Furthermore, dividend income from an offshore banking unit’s investment division will be taxed at a rate of 10%.

Dividend Income deductions

When a dividend is shown as business revenue, the taxpayer could subtract all cost incurred to accrue the dividend income, such as collection charges, loan interest, and so on. If a dividend is taxable under the other sources category, the taxpayer can deduct only the interest expense incurred to earn that dividend income up to 20% of the total dividend income. Any other expenses, including commissions or remuneration paid to a banker or any other person for the purpose of realising such dividend, are not deductible.

Reporting requirements for dividend payments/distribution

The SFT for Dividend Income shall be furnished on or before the 31st May, immediately following the financial year in which the transaction is registered or recorded. Therefore, the due date to file SFT for Dividend Income for FY 2020-21 is 31st May, 2021. Such a statement must also be filed for dividend payouts in subsequent fiscal years. In order to make the return filing process easier and to ensure pre-filled data in the IT Return, the government has made it mandatory for companies to file information about such dividend payments.

The records submitted through this SFT will be pre-filled in the ITR form of the person receiving such dividend, and it will also be available for viewing in such person’s annual information system (Form 26AS).

Dividends paid or distributed, whether final or interim, must be reported using SFT. Furthermore, even deemed dividends under section 2(22)(e) must be reported in such a financial transaction statement. There is no minimum threshold for filing SFT for dividends. As a result, any dividend payment must be reported via SFT.

Conclusion

Dividend income in India has been taxed in the hands of shareholders since the inception of the Income Tax Act, 1961 (‘IT Act’) (s). However, in 1997, the Indian government introduced the Dividend Distribution Tax (‘DDT’) regime, which resulted in a radical change in dividend income taxation (placing an obligation on Indian companies declaring dividends to pay tax, whereas in the hands of shareholders the same dividend income was not taxed). 

The DDT regime was then suspended for a year in 2002, and dividend income was once again taxed in the hands of shareholders. However, the regime was reinstated in 2003. Now, the Finance Act of 2020 (effective 1 April 2020) has reintroduced the traditional system of taxing dividend income in the hands of the shareholder(s) by the shareholder(s).