Taxability of Dividend Income from Domestic companies as per  Finance Bill 2020

In Finance Bill, 2020 (Bill), one of the biggest move of the government was the abolishment of the Dividend distribution Tax charged under the Income Tax Act , 1961 and to made the dividend taxable in the hands of the recipient.

Presently (On or Before 31st March 2020)

  • DDT is payable by domestic companies at the rate specified in the Act on the dividends proposed to be paid to shareholders.
  • These dividends are exempt from tax in the hands of shareholders. However, as per section 115BBDA if the shareholder receive dividend more than Rs. 10 Lakhs then it is taxable @ 10% in the hands of recipient.

On or After 01st April 2020 (Finance Bill 2020)

  • Section 115-O:- Domestic company will no longer be liable to pay DDT on the dividend paid to shareholders if the dividend is paid on or after 01.04.2020.
  • Section 10(34):- Dividend distributed by domestic company will no longer be exempt in the hands of recipient on or after 01-04-2020. That means Dividend received from domestic company will be taxable in the hands of the shareholders by clubbing the dividend income in the total income of the assessee and will be taxed as applicable tax rates.
  • Section 57:- No deduction allowed from dividend income except deduction of the interest expense in respect to the dividend Income is allowed in any previous year, such deduction shall not exceed 20% of the dividend income included in the total income for that year. E.g. if any person has taken a loan to invest in the shares of a company then, the interest on loan is allowed as a deduction but subject to the 20% of the dividend income.
  • Section 80M:- A new section 80M has also been inserted in which the deduction in respect of certain inter corporate dividend is provided.
    • Under this section if gross total income of a domestic company in any previous year includes any income by way of dividends from any other domestic company.
    • And that company has distributed dividend one month prior to the date for furnishing the return of income under sub-section (1) of section 139. (on or before one month prior to due date of furnishing Income tax return).
    • Then, a deduction of an amount equal to amount of dividend income from such other domestic company shall be allowed but not exceeding the amount of dividend distributed by company.

E.g. “A” company has received dividend of Rs. 5 crores from “B” domestic company and distributed dividend of Rs. 3 crores to its shareholders then Company “A” will be allowed Rs. 3 crores as deduction from dividend income of Rs. 5 crores.