Taxation of dividend – How Does it works?
Definition of Dividend –
The definition of dividend has been given in Section 2(22) of the Income tax Act. It includes –
It would not include–
Shares distributed in the event of Demerger.Dividend being paid as a set off against the previous dues towards the company.Distribution in the event of Buy back of shares.Any advance or loan to the shareholder where the main business is to lend money.
How dividend is taxed?
Actually the dividend is not taxed by the receiver or the beneficial but by the payer of dividend, i.e. the dividend is paid by company so the company would be liable to deduct the tax and pay in the name of “Dividend Distribution Tax”. Hence the income of Dividend is exempt in the hands of receiver or the investors.
Rate of Tax:
The rate at which the company needs to pay tax is 15% + cess which is applicable. It would also cover deemed dividend under section 2(22)(e), but where the situation is reverse. Here the dividend is taxable in the hands of investor or the receiver and not the company.
Dividends – Meaning and Various TypesDeemed Dividend – Section 2(22)(e)Tax treatment of dividend received from a foreign companyDividend Distribution Tax
When it is to be paid?
There has been special provision regarding the payment of the dividend tax paid where the earliest of the below should be taken and from that date within 14 days the tax need to be deposited
Declaration of dividendDistribution of dividendPayment of dividend
Relief in case of double taxation –
Where the dividend is received from the foreign company than the tax would be levied by the country in which the company is situated and in which the dividend is paid, so there would be taxation two times on the same dividend which would double tax dividend. So to avoid the same, there is specific section called 91 which would give relief if there is no Double Tax Avoidance Agreement.
Consequences of not paying the tax:
If the dividend tax is not paid within the time limit provided in the act than the interest would be levied at the rate of 1% per month or part there of on the amount of such tax for the period beginning on the date after the last date on which the tax is payable.
