TDS on Dividend on Equity Shares

Dividend Received from Indian Company:

A company which has made arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment by any mode in respect of any dividend or before making any payment to a shareholder, shall deduct tax from the amount of such dividend, at the rate of 10%.

Provided that no such deduction shall be made in the case of shareholder, being an individual, if:

1. the dividend is paid  by any mode other than cash; and
2. the payment of dividend does not exceed 5000 in a financial year.

• Provided further that the provisions of this section shall not apply to such income paid to:-

(a) the Life Insurance Corporation of India formed under the Life Insurance Corporation Act, 1956 , in respect of any shares owned by it or in which it has full beneficial interest.

(b) the General Insurance Corporation of India established under the General Insurance Business (Nationalisation) Act, 1972 , in respect of any shares owned by it or such company or in which the such company has full beneficial interest;

(c) any other insurance company in which shares owned by it or in which it has full beneficial interest.

Certain Terms which need to be understood in case of TDS on dividend on Equity Shares

DEDUCTOR: 

The company distributing dividends to the shareholders of equity shares should deduct TDS on such dividends. The deductor must deposit the TDS and file the TDS Return on traces.

DEDUCTEE:

As per the provisions the shareholder who is resident in India earning dividend income on equity shares will receive the amount after TDS. Shareholder who is resident in India earning dividend income on equity mutual funds will receive the amount after TDS as per Section 194K. NRI investors/shareholders, earning dividend income will receive the amount after deduction of TDS as per Section 195.

RATE OF TDS ON DIVIDEND ON EQUITY SHARES:

Deductor shall require to deduct TDS u/s 194 at the rate of 10% if the dividend amount exceeds Rs. 5000. Provided the payee does not provide the PAN, he is required to deduct TDS at the rate of 20%.

WHEN TO DEDUCT TAX IN CASE OF DIVIDEND ON EQUITY SHARES (SECTION 194):

Deductor shall deduct Tax at the time of credit of income to payee account or at the time of payment, whichever is earlier. If the payee of the amount credits the amount to be paid to “suspense account” or any other account, it is considered as ‘deemed payment’ and the payer must deduct TDS on such credit.

NATURE OF PAYMENTS:

The payment under section 194 must exceeds INR 5000 in a financial year.

TDS RETURN: 

The deductor should file Form 26Q on TRACES after depositing TDS with income tax department. The details of the dividend payment are part of this report. The deductor should provide Form 16A to the deductee, after filling this report.

TDS CERTIFICATE: 

Form 16A shall be issued by deductor to the deductee as the Tax Credit Certificate of the amount deducted as TDS. While filing ITR, the deductee can claim credit of the tax deducted using Form 16A .

DIVIDEND RECEIVED FROM FOREIGN COMPANY:

Dividend from Foreign Company is taxable under the head “Income from Other Sources”. Dividend received from a foreign company will be included in the total income of the taxpayer and will be charged to tax at the slab rates applicable to the taxpayer.  For Example, if the taxpayer comes in the 30% tax slab rate, then such dividend will also be taxable at 30% along with cess.

In present case, the investor can claim deduction only for the interest expense restricted to 20% of the gross dividend income.

RELIEF FROM DOUBLE TAXATION:

Dividend received from a foreign company have to taxed both in India and in the home country of the foreign company. However, if the tax on foreign company’s dividend has been paid twice (i.e. paid on both the nations), then the taxpayer can claim double taxation relief.