Question

When are Dividends taxable to a corporation?

Answer 1

Dividend received from an Indian company was exempt until 31 March 2020 (FY 2019-20). That was because the company declaring such dividend already paid dividend distribution tax (DDT) before making payment.

However, the Finance Act, 2020 changed the method of dividend taxation. Henceforth, all dividend received on or after 1 April 2020 is taxable in the hands of the investor/shareholder. The DDT liability on companies and mutual funds stand withdrawn. Similarly, the tax of 10% on dividend receipts of resident individuals, HUF and firms in excess of Rs 10 lakh (Section 115BBDA) also stands withdrawn.

The Finance Act, 2020 also imposes a TDS on dividend distribution by companies and mutual funds on or after 1 April 2020. The normal rate of TDS is 10% on dividend income paid in excess of Rs 5,000 from a company or mutual fund. However, as a COVID-19 relief measure, the government reduced the TDS rate to 7.5% for distribution from 14 May 2020 until 31 March 2021.

For instance, Mr Ravi received dividend amounting to Rs 6,000 from an Indian company on 15 June 2020. Since his dividend income exceeds Rs 5,000, the company will deduct a TDS @7.5% on the dividend income which is Rs 450. Mr Ravi will receive the balance amount of Rs 5,550. Further, the dividend income is the taxable income of Mr Ravi taxed at the slab rates applicable for FY 2020-21 (AY 2021-22).