Taxability Of Dividend Above ₹10 Lakh
Dividend received from domestic companies in excess of ₹10 lakh attracts tax @ 10% under Section 115BBDA
(1) BACKGROUND : Dividend income received from domestic companies was exempt in the hands of the shareholders, provided the company had paid
Dividend Distribution Tax (DDT).
There was no cap on the amount of dividend which was exempt in the hands of the shareholders. To bring some of the high dividend earners into the tax net, a cap was introduced by amendment to Finance Act 2016. Hence, if an individual receives dividend exceeding ₹10 lakh in the aggregate in a particular financial year, he is liable to pay additional tax @10 per cent on the amount in excess of ₹10 lakh.
Initially, the dividend was exempt in the hands of the shareholders as measure to encourage investment in shares of domestic companies. Subsequently the taxability of dividend shifted to the recipient, and again later on, it was shifted from the recipient back to the companies. The Finance Minister, while introducing the Finance Bill 2016, and with a view to rationalize the tax treatment, tried to do a balancing act by imposing tax on dividend, both in the hands of recipient by introducing new Section 115BBDA and also on the companies by the Dividend Distribution Tax under Section 115O. However, a monetary ceiling of ₹10 lakh was prescribed. Thus, new tax was introduced so that a “person with relatively high income” can bear a high tax cost.
(2) Relevant provisions and its amendment : A new Section 115BBDA was inserted in the Income Tax Act to provide for levy of tax at 10 per cent on the dividend income in excess of ₹10 lakh received from the domestic companies by all residents other than domestic companies and certain recognized public trusts.
(3) Person likely to be affected : This section is applicable to resident individuals and HUFS, partnership firms, limited liability partnerships, private trusts, AOP, BOI, foreign companies, etc Hence, the section will not apply to non-residents, domestic companies and certain funds registered under section 10(23C), trusts or institutions registered under Section 12A or Section 12AA of the Income Tax Act.
(4) Tax rate : The tax rate is 10 per cent on the amount of dividend in excess of ₹10 lakh plus applicable surcharge and education cess, and as increased by income tax chargeable on total income as reduced by dividend income.
For example; if Mr A’s total income is ₹20 lakh, which includes dividend income of ₹15 lakh during the financial year 2017-18, then he is liable to pay additional tax at 10 per cent, plus applicable surcharge and education cess on ₹5 lakh and normal tax on income of ₹5 lakh.
No deduction in respect of any expenses or allowances or set-offs of loss will be allowed in computing income by way of dividend chargeable to tax at 10 per cent. In the example given above, if Mr A has business loss of ₹10 lakh, then also he is liable to pay additional tax at 10 per cent on excess of dividend of ₹5 lakh.
(5) Whether applicable to all dividend income or dividend received from companies only : For the purpose of the section, dividend means dividend as defined under Section 2 (22) of the Income Tax Act, excluding dividend referred in sub-clause (e) thereof.
Under sub-clause (e), certain amount is treated as deemed dividend, which is not covered under the new provisions, since it is taxable in the hands of recipients at a normal regular rate. Further, dividend received from foreign companies is also not covered under the new provisions since the same is taxable separately as “income from other sources” at normal rate of tax.
(6) Whether applicable to dividend received from mutual fund :
The language of the section is very clear that dividend received in excess of ₹10 lakh in the aggregate from domestic companies attracts additional tax.
Therefore, the intention of the legislature is very clear: to tax the dividend income received on equity shares. The mutual fund holders do not hold any equity shares, but they hold units. Further, the mutual fund holders are not the shareholders of the company, but they are the creditors. Thus, the ceiling limit of ₹10 lakh is applicable only to dividend income from equity shares and not from units of mutual funds.