Such shareholder here means a shareholder who is beneficial owner of share holding not less than 10% voting power. Addition made by the Assessing Officer on account of concealed income forms part of accumulated profit. It is, therefore, essential to discuss meaning and scope of the expression “accumulated profits”.

  • Adividendcan be described as a reward that publicly-listed companies extend to their shareholders, and its source is the company’s net profit.
  • In case of dividend paid to non-residents, TDS provisions u/s 195 shall be applicable and for which the rate prescribed under the Act is 20 per cent.
  • Physical assets, investment instruments, and real estate may be used by some corporations to reward their shareholders.
  • Such a technique would eventually force a corporation to either cut or discontinue its offering.

Nevertheless, as a COVID-19 alleviation measure, the Indian government cut the TDS proportion for distributing from May 14, 2020, to March 31, 2021, to 7.5%. All dividend income received after or on 1st April 2020, is now chargeable to tax from the shareholder or the investor. In view of the above, presentation of DDT paid on the dividends should be consistent with the presentation of the transaction that creates those income tax consequences.

In India, a company which has declared, distributed or paid any amount as a dividend, is required to pay a dividend distribution tax at 15%. Dividends received from a foreign company will be included in the total income of the taxpayer and will be charged to tax at the rates applicable to the taxpayer. A resident individual receiving dividends whose estimated annual income is below the exemption limit can submit form 15G to the company or mutual fund paying the dividend. 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. After the abolition of the dividend distribution tax, the taxability of ‘dividend income is now in the hands of the investors.

Alternatively, investors can follow the « Cash Subscription » route in which they can pay cash directly to the Fund for purchasing the underlying portfolio in creation units size. The above lead are dividends an expense to inference that DDT is a portion of the dividends paid to Taxation Authorities on behalf of its Shareholders. As a result, the dividend yield is determined using the formula provided.

A maximum deduction of 20 percent of the gross dividend income is applicable. No TDS is applicable if the dividend to an individual shareholder — who is a resident — does not exceed Rs 5,000 in a fiscal year. The TDS free limit or the threshold of Rs 5,000 does not apply in case the shareholder is a Hindu Undivided Family , firm, company, trust, etc. An interim dividend, on the other hand, is taxable in the year in which the amount of the dividend is unconditionally made available to the shareholder by the firm. Many of you are wondering whether dividends received are taxed in your hands because they are considered income. Dividends can be paid out by a firm’s director board on a regular basis.

Annual Filings

Even though any dividend received from a foreign firm is taxable in India, it is subject to double taxation if it is also taxable in the country where the foreign company operates. If the dividend is taxable as business income – the taxpayer can claim tax deduction for all expenses related to earning the dividend income, such as collection fees, interest on a loan, and so on. If you invest in stocks, ULIPs, or mutual funds, you will receive a dividend. Dividends are the earned returns paid out to investors who have invested in stocks and similar schemes.

However, now since dividend income is made taxable in the hands of shareholders, interest expenses shall be claimed to the extent of 20% of such dividend income. There is a likelihood that the department may not agree to the interest deduction in case of shareholders who have earlier contended that no expense has been incurred in order to earn dividend income. Thus, shareholders may have to revisit their earlier tax positions in wake of taxability of dividends. This also would impact companies across sectors with profitable foreign operations. It may drive up the tax cost of repatriation of the funds back to India unless the dividends so received are further distributed to its shareholders within the specified timelines. This may have commercial implications on the overall structure for Indian companies of start-up going global as well encourage spinning of their existing structures.

Clear can also help you in getting your business registered for Goods & Services Tax Law. Both the Dividends account and the Retained Earnings account are part of stockholders’ equity. They are somewhat similar to the sole proprietor’s Drawing account and Capital account which are part of owner’s equity. No TDS is deducted if an individual furnishes a lower/NIL TDS certificate to the dividend paying company.

Aside from this, a firm may choose to pay a dividend in the form of new company shares, warrants, or other financial assets. However, it should be emphasized that dividend income has a positive impact on a company’s stock price. Companies, on the other hand, may choose to keep their profits and reinvest them in the business or set them aside for future use. Furthermore, dividend income declaration announcements are usually made in conjunction with a large gain or reduction in the company’s stock value.


The income generated by the individual from trading activities is taxable under the heading of “business income”.As a result, if shares are kept for trading purposes, dividend income is taxable under the heading “income from business or profession”. Distribution of accumulated profits to shareholders on the reduction of the company’s assets. Distribution of accumulated profits to shareholders, which involves the release of the company’s assets. The Finance Act of 2020 levies a Tax Deducted at Source on dividend distributions made by corporations and mutual funds beginning after or on 1st April 2020. TDS is normally levied at a proportion of 10% on dividend earnings in excess of 5,000 INR received from a corporation or mutual fund.

A good financial plan in place can help you achieve these goals at the required time. The company should have a fair track record when it comes to offering dividend and paying off debts. Though having a masters degree in Business Administration, her upbeat and optimistic approach for changes led her to pursue her passion i.e. Due to the unique in-kind creation / redemption process of ETFs, the liquidity of an ETF is actually the liquidity of the underlying shares. The Fund creates / redeems units only in predefined lot sizes in exchange for a predefined underlying portfolio basket (called “creation unit”).

are dividends an expense

Whereas, if shares are held as an investment then income arising in the nature of dividend shall be taxable under the head of income from other sources. Adividendcan be described as a reward that publicly-listed companies extend to their shareholders, and its source is the company’s net profit. Such rewards can either be in the form of cash, cash equivalent, shares, etc. and are mostly paid from the remaining share of profit once essential expenses are met. A company’s board of directors decides the rate of dividend, wherein, the approval of majority shareholders is also factored in.

Dividend stocks are publicly traded firms that pay dividends to their shareholders on a regular basis. These businesses are often well-established and have a track record of fairly allocating profits to shareholders. A payout ratio of more than 100%, for example, indicates that a corporation is paying out more than it earns from its shareholders. Such a technique would eventually force a corporation to either cut or discontinue its offering.


Dividends have an impact on a company’s total equity, hence they have a direct impact on its financial modeling. The table below illustrates the impact of dividends on a company’s financial accounts. The dividend income received by a non-resident shareholder , be taxed @ 20% without allowing any deductions.

are dividends an expense

The rate of tax and the taxability provisions on dividend, will depend upon residential status of the shareholders, and the head of income. Any benefit under the double taxation avoidance agreement between India and the other country may be explored separately to avoid double taxation or get a lower rate. The company will withhold tax on dividend either at 20% plus applicable surcharge and 4% health and education cess or at a rate under DTAA, whichever is lower. This provision is applicable only to companies in which the public is not substantially interested i.e. closely held companies.

Income tax on dividends: All you want to know

Further, such loan and advance given to such person shall be deemed to be dividend only to the extent to which it is shown that the company possesses accumulated profits on the date of loan, etc. . Any distribution by a company to its shareholders on the reduction of capital is treated as dividend to the extent the company possesses accumulated profits . Under sub-clause , any distribution made by a company to its shareholders on its liquidation is treated as dividend to the extent to which such distribution is attributable to the accumulated profits of the company immediately before its liquidation. While investing in mutual fund schemes, many people opt for the dividend payout option to get regular income while staying invested. People investing in direct equities also enjoy dividend income, depending on the quantum of profit earned by the companies.

Whereas, if shares are held as an investment, then income arising in nature of dividend shall be taxable under the head other sources. The income, taxable under the head PGBP, is computed in accordance with the method of accounting regularly followed by the assessee. For the purpose of computation of business income, a taxpayer can follow either mercantile system of accounting or cash basis of accounting. Whereas interim dividend is taxable in the previous year in which the amount of such dividend is unconditionally made available by the company to the shareholder. Also, as per section 57, the taxpayer cannot claim deduction of any expense against dividend income except interest expense on money borrowed for the purpose of investment. The deduction of interest expense will also be subject to a maximum limit of 20 per cent of amount of gross dividends.

In this situation also, tax rate applicable is at lower rate in view of the fact that tax on dividend has already been collected in the form of DDT. However, the said provisions shall not apply to dividend paid to Life Insurance Corporation of India , General Insurance Corporation of India or any other insurer holding shares in their own name, or as beneficial owners. Section 14A of the Act provides for disallowance of expenses that are incurred for earning exempt income. It has been contended by shareholders that no disallowance of interest expense can be made under section 14A since no expenses are incurred to earn exempt dividend income. This has given rise to prolonged litigation and there are a host of judgements in favour of assessees.

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