Tax­a­bil­ity Of Div­i­dend Above ₹10 Lakh

Div­i­dend re­ceived from do­mes­tic com­pa­nies in ex­cess of ₹10 lakh at­tracts tax @ 10% un­der Section 115BBDA

Dalal Street Investment Journal - - TAX COLUMN -

(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.

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