Tax on dividend income in India

Dividend, in ordinary sense, is   payment made by a company to its shareholder, out of profits earned by the company, in proportion to the ownership of the shareholder.  Tax on dividend income in India, depends on the following factors : –

• Rate of tax applicable on recipient – Individual, company, firm etc ;
• Whether recipient is a resident or non-resident

Rate of Tax on dividend income in India

Dividend income , is subject to tax at the following rates :

1. Individual Recipient  – Dividend income received by individual taxpayer, is subject to tax at the rate of tax , depending on the applicable income tax slab rates.
2. Domestic companies –  Dividend distributed by domestic companies is subject to  tax in the hands of the recipients of the dividend income . Domestic companies paying such dividend are liable to deduct TDS on such income as under : –
   • Dividend paid to a resident – 10%
   • Dividend paid to a non- resident – As per the rates in the relevant Tax Treaty
3. Foreign companies –  Dividend income received from foreign companies by an Indian tax resident is taxed as per the income tax slab rates applicable to the individual taxpayer.

Deemed Dividend

However, under Section 2(22) of the Income-tax Act, 1961 , certain payments made by the company to its shareholders, are also treated as dividend, in case a company has  accumulated profits. In such cases, tax  is still applicable on shareholders : –

1. Any cash / other payment by a company, which involves release of assets, other than issue of bonus shares, to its shareholders , out of its accumulated profits. It is immaterial if profits are capitalized or not
2. Any distribution by a company of debentures, debenture stock, or deposit certificates to its shareholders, or issue of bonus shares to preference shareholders, to the extent of accumulated profits.
3. Any distribution made to the shareholders by a company on reduction of share capital, ,  to the extent of accumulated profits upto the date of resolution permitting the reduction of share capital.
4. Any payment made by a company to its shareholders on the liquidation of the company to the extent of its accumulated profits.
5. Any payment made by a closely held company to its shareholders, in the form of loans or advances, to the extent of accumulated profits.