Dividends – Meaning, Types & Taxation (Section 2(22))
Company declares ₹10/share dividend - you get ₹10,000. Tax-free? Not anymore! From April 1, 2020, dividends are fully taxable. Let's understand the complete picture.
What is Dividend?
Definition (Section 2(22)): Distribution of profits by a company to its shareholders
Simple meaning: Share of company's profit paid to you (as shareholder)
Example:
- You own 1,000 shares of Reliance
- Reliance declares ₹10/share dividend
- You receive: ₹10,000
History of Dividend Taxation in India
Before April 1, 2020:
- Dividends exempt in hands of shareholder (Section 10(34))
- Company paid Dividend Distribution Tax (DDT) @ ~20%
- You paid zero tax!
From April 1, 2020 (Finance Act 2020):
- DDT abolished
- Dividends taxable in hands of shareholder
- Added to your income, taxed at slab rates
Why changed?
- Reduce tax burden on companies
- Tax shareholders based on their income level (progressive taxation)
Types of Dividends (Section 2(22))
1. Final Dividend
Declared at Annual General Meeting (AGM)
After approval: Pay shareholder within 30 days
Example:
- Reliance AGM on Sep 15, 2024
- Final dividend: ₹5/share
- Payment: By Oct 15, 2024
2. Interim Dividend
Declared between two AGMs (mid-year)
Board of Directors approval sufficient (no AGM needed)
Example:
- TCS declares interim dividend in Feb 2024
- ₹12/share
- Paid immediately
3. Deemed Dividend
Not actual distribution but treated as dividend for tax
Covered under Section 2(22)(e): Loans/advances to shareholders
Example:
Closely-held company (Mr. Sharma owns 60%):
- Company gives ₹15 lakh loan to Mr. Sharma (shareholder)
- Deemed dividend: ₹15 lakh taxable as dividend!
- Even though not declared as dividend
Conditions for deemed dividend (Section 2(22)(e)):
- Loan/advance to shareholder (holding substantial interest)
- Not in ordinary course of business
- Company has accumulated profits
Taxation of Dividends (FY 2024-25 onwards)
Head of Income: Income from Other Sources (Section 56)
Tax rate: As per your slab
No deductions allowed (except collection charges u/s 57)
Example:
Mrs. Verma:
- Salary: ₹10,00,000
- Dividend: ₹50,000
Total income: ₹10,50,000 Tax: ₹50k taxed at 30% slab (part of ₹10.5L)
Tax on dividend: ₹50k × 30% = ₹15,000
TDS on Dividend (Section 194)
Company deducts TDS before paying dividend
Rates:
- 10% if dividend > ₹5,000 in a year
- 20% if PAN not provided
Example 1:
Dividend: ₹50,000
- TDS: ₹50k × 10% = ₹5,000
- You receive: ₹45,000
- TDS credit of ₹5k in your Form 26AS
Example 2:
Dividend: ₹3,000
- TDS: Nil (below ₹5k threshold)
- You receive: ₹3,000
Adjustable: TDS adjusted against final tax liability while filing return
Dividend Stripping (Anti-Avoidance)
Concept: Buy shares just before dividend, sell after (to get dividend + claim capital loss)
Section 94(7) - Anti-abuse:
If you:
- Buy shares within 3 months before record date
- Sell shares within 3 months after record date
- Shares held for ≤ 9 months
Then: Loss on sale not allowed (to extent of dividend
received)
Example:
Purchased shares: ₹1,00,000 (2 months before dividend)
- Dividend received: ₹10,000
- Sold shares at loss: ₹1,05,000 (1 month after dividend)
- Capital loss: ₹5,000
Section 94(7) applies:
- Loss disallowed: ₹5,000 (as ₹10k dividend received)
- Cannot set off ₹5k loss!
Purpose: Prevent manipulation to convert dividend (taxable) into capital loss (set-off benefit)
Comparison: Old vs New Regime
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Winner: Low-income taxpayers (taxed at 5% instead of 20% DDT)
Loser: High-income taxpayers (taxed at 30% instead of exempt)
Practical Examples
Example 1: Simple Dividend Taxation
Mr. Kumar (FY 2024-25):
- Salary: ₹15,00,000
- Dividend from Infosys: ₹80,000 (TDS ₹8,000 already deducted)
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₹80k dividend effectively taxed at 30% = ₹24k tax (after ₹8k TDS credit)
Example 2: Deemed Dividend
XYZ Pvt Ltd (Mr. Raj owns 70%):
- Company has accumulated profits: ₹1 crore
- Gives Mr. Raj personal loan: ₹20 lakh
Deemed dividend u/s 2(22)(e): ₹20 lakh
Mr. Raj's income:
- Salary: ₹30 lakh
- Deemed dividend: ₹20 lakh
- Total: ₹50 lakh
Tax on ₹20L deemed dividend: ₹20L × 30% = ₹6 lakh (even though loan, not actual dividend!)
Mutual Fund Dividends
Equity Mutual Funds: Dividend taxable as "Other Sources"
Debt Mutual Funds: Dividend taxable as "Other Sources"
TDS: 10% if dividend > ₹5k
Example:
HDFC Equity Fund dividend: ₹12,000
- TDS: ₹1,200
- Net received: ₹10,800
- Your tax: As per your slab (₹12k added to income)
Special Case: Dividend from Foreign Companies
Foreign company dividend: Taxable in India
DTAA (Double Taxation Avoidance Agreement): Prevents double tax
Example:
Apple shares dividend: $100 (₹8,000)
- Tax paid in USA: $15 (₹1,200)
- Taxable in India: ₹8,000
- India tax: ₹8k × 30% = ₹2,400
- Credit for USA tax: ₹1,200
- Final India tax: ₹1,200
DTAA ensures you don't pay full tax in both countries!
Return Filing
Form 26AS: TDS on dividend auto-populated
ITR: Add dividend to "Income from Other Sources"
Proof: Dividend warrant/statement from company
TDS mismatch: Check Form 26AS, inform company
Summary Table
| Aspect | Details |
|---|---|
| Taxable? | Yes (from April 2020) |
| Head | Other Sources (Section 56) |
| Tax Rate | Slab rates (5%-30%) |
| TDS | 10% if > ₹5,000/year |
| Threshold | ₹5,000 (below = no TDS) |
| DDT | Abolished (earlier 20%) |
| Deemed dividend | Section 2(22)(e) - loans to shareholders |
| Dividend stripping | Section 94(7) - loss disallowed |
Summary
- Dividend: Share of company profits distributed to shareholders (Section 2(22))
- Types: Final (AGM), Interim (mid-year), Deemed (loans to shareholders u/s 2(22)(e))
- Taxation: Fully taxable from April 2020 (DDT abolished), taxed at slab rates
- TDS: 10% if dividend > ₹5,000 in a year (Section 194)
- Head: Income from Other Sources (Section 56)
- Dividend stripping: Section 94(7) disallows capital loss if shares bought/sold within 3 months of dividend
- Change: Earlier exempt (company paid DDT), now shareholder pays as per slab (progressive taxation)
- Mutual funds: Dividend taxable, TDS @ 10% if > ₹5k
Quiz Time! 🎯
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