How to Calculate Tax on Share Dividends ?

Know the steps to Calculate Tax on Share Dividends or Dividend Distribution TaxIn terms of the provisions of the Income-tax Act, 1961, (“the Act”) as amended by the Finance Act, 2020, dividend paid or distributed by a Company on or after 1st April, 2020 shall be taxable in the hands of the shareholders. The Company shall therefore be required to deduct tax at source at the time of payment of dividend to shareholders.

The share dividend, as declared by the Board of the company will be paid to those shareholders who would be holding equity shares of the Company, either in electronic or in physical form as on certain date.

Who are eligible for Tax on Share Dividends ?

For resident shareholders: tax will be deducted at source (“TDS) under Section 194 of the Act @ 10% on the amount of dividend payable unless exempt under any of the provisions of the Act. However, in case of individuals, TDS would not apply if the aggregate of total dividend distributed to them by the Company during the financial year does not exceed Rs. 5,000.

Tax at source will not be deducted in cases where a shareholder provides Form 15G (applicable to any person other than a Company or a Firm) / Form 15H (applicable to an individual above the age of 60 years), provided that the eligibility conditions are being met. Blank Form 15G and 15H can also be downloaded from the Income tax India website. For submission of 15 G/ 15 H, the Permanent Account Number (PAN) will be mandatorily required.

Exempted from Tax

  • Insurance companies
  • Mutual Funds
  • Alternative Investment Fund (AIF) established in India: A declaration that its income is exempt under section 10(23FBA) of the Act and they are established as Category I or Category II AIF under the SEBI regulations. 
For non-resident shareholders: tax is required to be withheld in accordance with the provisions of Section 195 of the Act at applicable rates in force. As per the relevant provisions of the Act, the tax shall be withheld @ 20% (plus applicable surcharge and cess) on the amount of dividend payable. However, as per Section 90 of the Act, a non-resident shareholder has the option to be governed by the provisions of the Double Tax Avoidance Agreement (“DTAA”) between India and the country of tax residence of the shareholder, if they are more beneficial to the shareholder. For this purpose, i.e. to avail the Tax Treaty benefits, the non-resident shareholder will have to provide the following:
  1. Self-attested copy of Permanent Account Number (PAN Card), if any, allotted by the Indian income tax authorities;
  2. Self-attested copy of Tax Residency Certificate (TRC) for Calendar Year / Financial Year obtained from the tax authorities of the country of which the shareholder is tax resident;
  3. Self-declaration in Form 10F;
  4. Self-declaration by the non-resident shareholder of having no permanent establishment in India in accordance with the applicable Tax Treaty;
  5. Self-declaration of beneficial ownership by the non-resident shareholder.
  6. Order from income tax department u/s 197 of the Act for Nil or lower rate TDS, as may be applicable
The Company is not obligated to apply the beneficial DTAA rates at the time of tax deduction / withholding on dividend amounts. Application of beneficial DTAA Rate is dependent upon the completeness and satisfactory review by the Company, of the documents submitted by Non- Resident shareholder.
 
For FII/FPI shareholders, holding shares of the Company as on the Record Date, tax shall be deducted at source @ 20% (plus applicable surcharge and cess) on dividend paid to Foreign Institutional Investors (FII) and Foreign Portfolio Investors (FPI) under section 196D of the Income Tax Act, 1961. However, as per proviso to sub-section (1) of section 196D (inserted vide Finance Act, 2021), the payment to FII/FPI will be subjected to TDS @ 20% (plus applicable surcharge and cess) or the rate prescribed under the Double Tax Avoidance Agreement (“DTAA”) between India and the country of tax residence of the FII/FPI, whichever is more beneficial to the shareholder. For this purpose, i.e. to avail the Tax Treaty benefits, the FII/FPI shareholder will have to provide the following:
  1. Self-attested copy of Permanent Account Number (PAN Card), allotted by the Indian income tax authorities;
  2. Self-attested copy of Tax Residency Certificate (TRC) for Calendar Year 2021/ Financial Year 2021-22 obtained from the tax authorities of the country of which the shareholder is a tax resident;
  3. Self-declaration in Form 10F;
  4. Self-declaration by the FII/FPI shareholder of having no permanent establishment in India in accordance with the applicable Tax Treaty;
  5. Self-declaration of beneficial ownership by the FII/FPI.
  6. Order from income tax department u/s 197/195 of the Act for Nil or lower rate TDS, as may be applicable

The Company is not obligated to apply the beneficial DTAA rates at the time of tax deduction / withholding on dividend amounts. Application of beneficial DTAA Rate is dependent upon the completeness and satisfactory review by the Company, of the documents submitted by FII/FPI.

For GDR holders – tax is required to be withheld @ 10% (plus applicable surcharge and cess) in accordance with the provision of section 115AC of the Act.

 
Dividend will be paid after deducting the tax at source as under:
  • NIL for Individual resident shareholders receiving dividend upto Rs.5000 or in case Form 15G / Form 15H (as applicable) along with self-attested copy of the PAN is submitted
  • 10% for resident shareholders in case PAN is provided/available
  • 20% for resident shareholders, if PAN is not provided / not available
  • Tax will be assessed on the basis of documents submitted by the non-resident shareholders
  • 20% plus applicable surcharge and cess for non-resident shareholders/ FII and FPI, in case the aforementioned documents are not submitted
  • 10% plus applicable surcharge and cess for GDR holders
  • Lower/ NIL TDS on submission of self-attested copy of the certificate issued under section 197 of the Income Tax Act, 1961

Also Know – How To Calculate Tax on Share & Stocks Income ?

Click Here to download – 15H
Click Here to download – 15G
Click Here to download – 10F

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