Scenario pre-Budget 2020

• Tax on distributed profits of domestic companies – Section 115-O – Domestic companies were liable to pay Dividend Distribution Tax (DDT) at 15% (plus applicable surcharge and cess) of the aggregate dividend declared, distributed or paid.


• Exemption – Section 10(34) – Dividend received from a domestic company is exempt in the hands of shareholder to the extent of INR 10 lakhs.


• Dividend income received in excess of INR 10 lakhs – Section 115BBDA – The shareholder is taxed at a flat rate of 10% (plus applicable surcharge and cess) in case the aggregate dividend received exceeds INR 10 lakhs.


• TDS on dividend – Section 194 – Where dividend paid to a resident shareholder exceeds INR 2,500 by way of other than account payee cheque, tax at the rate of 10% would be deducted.

 

Scenario post-Budget 2020:

• The DDT has been abolished and the classical system of taxing dividends is adopted under which the companies would not be required to pay DDT. The dividend shall be taxed only in the hands of the recipients / investor at the tax rates applicable to them.


• Dividends received in excess of INR 10 lakhs which is taxed at the rate of 10% stands withdrawn.


• Where dividend paid to a resident shareholder exceeds INR 5,000 by way of other than cash, tax at the rate of 10% would be deducted. However, as a COVID-19 relief measure the TDS rate has been reduced by 2.5% making it 7.5% till March 2021.


• The interest expense, if any incurred to earn the dividend shall be allowed as a deduction. However, such expenditure shall not exceed 20% of the dividend income.


• Section 80M – A new section has been inserted, wherein dividend received by an domestic company from another domestic company shall not be taxable to the extent it is distributed by such company. This move will remove the cascading effect in multi-tier corporate structures.