Section 10 of the Income Tax Act exempts dividends received from an Indian corporation that has paid dividend distribution tax (34). However, if the aggregate amount of dividends received from a domestic company during the year exceeds Rs. 10,000, a “specified assessee”* will be subject to tax at the rate of 10% under section 115BBDA. Dividends received from an Indian firm are exempt under section 10(34), whereas dividends received from a foreign corporation are not. As a result, a dividend received from a foreign corporation by an Indian resident is taxed. This section will teach you about the tax implications of receiving a dividend from a foreign corporation.

A person aside from a domestic company, a fund, institution, or trust, or any university or other institution, or a hospital or other consultation room spoken in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, or a trust or institution registered under section 12A or section 12AA, could be a “specified assessee.”

What Does A Dividend Mean?

The gains delivered by a firm to its shareholders are known as a dividend. Apart from that, section 2(22)(e) defines a considered dividend as a dividend paid by a firm to its shareholders. As a result, the considered dividend is included in the definition of dividend under the Income Tax Act. According to section 2(22), “dividend” refers to the following payments or distributions made from the company’s accumulated earnings [whether or not capitalized profit in the case of sections 2(22)(a) to (d) and capitalized profit in the case of section 2(22)(e)]:

(a) any distribution if the distribution comprises the release of all or a portion of the company’s assets;

(b) any distribution of debentures, debenture stock, or deposit certificates in any form, with or without interest, as well as any distribution of bonus shares to its preference shareholders;

(c) any distribution made in the case of a company’s liquidation, unless the shareholder is not entitled to a portion of the surplus asset and shares were granted to him for full cash consideration.

(d) any dividend on a company’s capital reduction, unless the shareholder is not entitled to a portion of the surplus asset in the case of liquidation and the shares were issued to him for full cash consideration.

(e) Any loans or advances made by a closely-held company (i.e., a company in which the public is not substantially interested) to a shareholder who is the beneficial owner of shares in the company with not less than 10% voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest, or any payment made on behalf of such shareholder for his/her individual benefit. However, if the payment is made in the ordinary course of business and money lending constitutes a significant part of the company’s business, it will not be considered a dividend.

The Term “Dividend” Does Not, However, Include —

I any payment paid by a company in connection with the purchase of its own shares from a shareholder under Section 77A of the Companies Act, 1956;

(ii) any share distribution made by the resulting company to the shareholders of the demerged business in line with the scheme of demerger, whether or not the demerged company’s capital is reduced.

(iii) any dividend paid by a company that is set off by the company against all or part of any sum previously paid by it and is recognized as a dividend within the meaning of subclause (e), to the extent that it is so set off.

Note:

The Finance Act of 2018 adds a new Explanation 2A to Section 2(22) with effect from Assessment Year 2018-19, stating that in the case of an amalgamated company, the accumulated profit or loss of the amalgamating company (whether capitalized or not) on the date of amalgamation shall be increased.

Head Of Taxability And Tax Rate

Taxability Of Dividend Income From Foreign Company

Head of taxability and tax rate that applies Dividends are taxed under the heading “Income from other sources,” so a dividend received from a foreign corporation is taxed under the heading “Income from other sources.” Dividends received from a foreign company will be included in the taxpayer’s total income and will be taxed at the taxpayer’s current rates.

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Elimination Of Double Taxation

Taxability Of Dividend Income From Foreign Company

Dividends received from a foreign company are taxed in both India and the country where the foreign company is based. If a foreign dividend has been subjected to double taxation, the taxpayer can seek double taxation relief under the provisions of a Double Taxation Avoidance Agreement (if any) entered into by the Government of India with that nation (if any), or under section 91 of the Income Tax Act (if no such agreement exists). To determine the tax treatment of a dividend received from a foreign corporation, the taxpayer should consider the requirements of the Income Tax Act, as well as the provisions of any Double Taxation Avoidance Agreement (DTAA), entered into with that country (if any) (if any).

Dividends Received From A Foreign Specified Corporation Are Taxed At A Reduced Rate

As previously stated, a resident taxpayer’s dividend received from a foreign corporation is taxed at the standard rates applicable to his income. Because the normal tax rate for an Indian company is 30% (with surcharge and cess as needed), dividends received from a foreign corporation are taxed at 30% in the hands of an Indian company. Section 115BBD, on the other hand, offers a lower tax rate on dividends received by an Indian company from a foreign firm if the Indian company owns 26 percent or more of the notional value of the equity share capital of the foreign company.

Dividends [as defined in section 2(22) except dividends as defined in section 2(22)(e)] received by an Indian company from a foreign company in which the Indian company holds a nominal value of 26 percent or more of the equity share capital are taxed at a flat rate of 15 percent under section 115BBD (plus surcharge and cess as applicable).

It should be emphasized, however, that no deduction for any expenditure or allowance will be permitted from the amount of the dividend covered by section 115BBD in the aforesaid scenario. In other words, the gross amount of the dividend (before any deductions or allowances) will be taxed at a rate of 15%. (plus surcharge and cess as applicable).