BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY
Taxation of Dividends CA Divya Jokhakar
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© All copyright with The Bombay Chartered Accountants’ Society, Mumbai Price : ` 385 Edition : 2025 Published by : Taxmann Publications (P.) Ltd. Sales & Marketing : 59/32, New Rohtak Road, New Delhi-110 005 India Phone : +91-11-45562222 Website : www.taxmann.com E-mail : sales@taxmann.com Mumbai : 35, Bodke Building, M.G. Road, Opp. Railway Station, Mulund (W), Mumbai - 400 080 Mob. +91-9322247686, 9619668669, 7045453844/45/51 E-mail : sales.mumbai@taxmann.com Regd. Office : 21/35, West Punjabi Bagh, New Delhi-110 026 India Printed at : Tan Prints (India) Pvt. Ltd. 44 Km. Mile Stone, National Highway, Rohtak Road Village Rohad, Distt. Jhajjar (Haryana) India E-mail : sales@tanprints.com Disclaimer Every effort has been made to avoid errors or omissions in this publication. In spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition. It is notified that neither the publisher nor the Bombay Chartered Accountants’ Society or seller will be responsible for any damage or loss of action to any one, of any kind, in any manner, therefrom. It is suggested that to avoid any doubt the reader should crosscheck all the facts, law and contents of the publication with original Government publication or notifications. No part of this book may be reproduced or copied in any form or by any means [graphic, electronic or mechanical, including photocopying, recording, taping, or information retrieval systems] or reproduced on any disc, tape, perforated media or other information storage device, etc., without the written permission of the Bombay Chartered Accountants’ Society. Breach of this condition is liable for legal action. For binding mistake, misprints or for missing pages, etc., the publisher’s liability is limited to replacement within seven days of purchase by similar edition. All expenses in this connection are to be borne by the purchaser. All disputes are subject to Mumbai jurisdiction only.
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CONTENTS PAGE
Dedication
I-3
About BCAS & BCAS Foundation
I-5
Foreword
I-7
Managing Committee (MCM) 2025-26
I-9
Direct Tax Committee (DTC)
I-11
CHAPTER 1 BACKGROUND AND DEVELOPMENTS TILL DATE 1.1 1.2 1.3
1
Background
History of Taxation of Dividends
Developments in the last few years
2 3
CHAPTER 2
DEFINITION OF DIVIDEND 2.1 2.2 2.3 2.4
General
5
Payments not considered as deemed dividend
9
5
Definition under the Act
The concept of deemed dividend
7
CHAPTER 3
SECTION 8 : INCOME FROM DIVIDENDS — YEAR OF TAXABILITY 3.1 3.2 3.3
12
General
12
Year of chargeability
13
Issues
I-13
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Contents PAGE
CHAPTER 4 DIVIDENDS CHARACTERIZATION AND DEDUCTIBILITY OF EXPENDITURE 4.1 4.2 4.3
15
Background and General
Taxability Computation and timing Deductions
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CHAPTER 5 DIVIDEND IMPACT OF STATUS
5.1 5.2 5.3 5.4
Background and General
20
Dividend income - Foreign Company
22
20
Taxability
22
Deductions
CHAPTER 6
DIVIDEND STRIPPING - TAX ASPECTS 6.1 6.2 6.3
Introduction
24
Important Judicial precedents
27
Restriction on claim of expenditure (Sec. 14A) and disallowance of loss in certain cases 94(7)
25
CHAPTER 7
DEDUCTION U/S 80M 7.1 7.2 7.3 7.4
Background and General
30
Implications of section 80M (in various situations)
32
31
Reintroduction of 80M
31
Applicability
I-14
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Contents PAGE
CHAPTER 8 APPLICABLE TAX RATES AND TAX DEDUCTION AT SOURCE ON DIVIDENDS 8.1 8.2 8.3 8.4 8.5 8.6
33
Taxability of Dividends
Taxability in the case of different investors
34
Advantages of a Tax treaty with respect to incomes
37
Tax Rates under the Double Tax Avoidance Agreements (DTAA)/Multi-Lateral Instruments (MLI) Tax Deducted at Source
Effect of section 206AA and section 206AB on the rates of TDS
36 39 41
CHAPTER 9
JUDICIAL PRECEDENTS 9.1 9.2
9.3
9.4
9.5
9.6
Applicability of AY for payment of Dividend Distribution Tax Tax rate under Article 10 of India Switzerland DTAA can be used for deduction of taxes u/s 115-O of the Income Tax Act
Payment by way of buyback of shares made by the assessee, to its related party, in excess of FMV of the share of the assessee company would fall in the ambit of Section 2(22)(e), i.e. Deemed Dividend
Assessee society received dividend income from an Omani Company on which it was not liable to pay any tax in Oman by virtue of exemption granted as per Omani Tax laws - assessee entitled to tax credit in India
Where dividend was earned and the same is exempt, the provisions of section 14A would get attracted and the dominant purpose theory was not acceptable The character of dividend income would remain business income and therefore eligible for set off of losses I-15
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Contents PAGE
CHAPTER 10 FREQUENTLY ASKED QUESTIONS 10.1 Chargeability & Taxability
48
10.2 Tax Rate and Tax Deducted at Source
50
CHAPTER 11
BUY BACK OF SHARES (NOW TAXED AS DIVIDEND) 11.1 Taxation on Buy Back before 1st October, 2024
52
11.4 Computation of Income along with Treaty Implications
55
11.2 Amendment in the Finance Act, 2024
53
11.5 Issues and Questions
55
11.3 Implications in the hands of payer and payee
53
11.6 Remarks and Related Case laws impacting the amendment 56
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CHAPTER
5
Dividend impact of status
5.1 Background and General Shareholders account/hold investments in equity shares as stock-intrade or investments. The reason for holding the shares as investments is to earn from its growth and from return on that growth. Some of the discussion contained in this chapter has already been referred to in Chapter 4 but for the sake of clarity the same is being reiterated in this chapter. Such return u/s 56(1) being dividends earned from securities as investment shall be considered under the head “Income from Other Sources”. This is a residuary head of income and seeks to tax such income that does not belong to other four heads namely Salary, House Property, Business Income and Capital Gains. However, section 56(2) brings to tax certain categories of income under this head specifically. Until 31st March, 2020 (AY 20-21) dividend from an Indian company, was exempt u/s 10(34) of the Act. Simultaneously, a domestic company was required to pay Dividend Distribution Tax (DDT) u/s 115-O. Thus, at that time DDT was paid by the payer company, and receipt of dividend was exempt in the hands of shareholders. 5.2 Taxability
u
Section 8 of the Income Tax Act, 1961 clarifies that for the purposes of inclusion in the total income of an assessee, — (a) any dividend declared by a company or distributed or paid by it within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be;
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Dividend impact of status
(b) any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it. Final dividend shall be taxable in the year in which the right to receive is established, i.e. when it is declared at the Annual General Meeting (AGM) of the company. u
u
u
(c) Deemed dividend u/s 2(22) shall be taxable in the year in which it is distributed or paid by the company.
The dividend income shall be chargeable to tax at normal tax rates as applicable in case of an assessee except where a resident individual, being an employee of an Indian company or its subsidiary engaged in Information technology, entertainment, pharmaceutical or bio-technology industry, receives dividend in respect of GDRs issued by such company under an Employees’ Stock Option Scheme. In such a case, dividend shall be taxable at concessional tax rate of 10% without providing for any deduction under the Income-tax Act. However, the GDRs should be purchased by the employee in foreign currency. Also, where the dividend is received in respect of GDRs of an Indian Company or Public Sector Company (PSU) purchased in foreign currency, the tax shall be charged at the rate of 10% without providing for any deductions. The relevant sections under which different persons will be taxed tax is charged are as under:
Section
Assessee
Particulars
Tax Rate
Section 115AC
Non-Resident
Dividends on GDRs of an Indian Company or Public Sector Company (PSU) purchased in foreign currency
10%
Section 115AD
Section 115E
FII Investment division of an offshore banking unit
Non-resident Indian
Dividend income from securities (other than units referred to in section 115AB)
20%
Dividend income from shares of an Indian company purchased in foreign currency.
20%
Dividend income from securities (other than units referred to in section 115AB)
10%
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Dividend impact of status
Section
Assessee
Particulars
Tax Rate
Section 115A
Non-resident or foreign co.
Dividend income in any other case
20%
Section 115A
Non-resident or foreign co.
5.3 Deductions
Dividend from a unit in an International financial services centre
10%
Upto AY 2021-22 deduction of any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realizing such dividend or interest on behalf of the assessee is allowed as a deductible amount against dividend income u/s 57(i). It was held in the case of Ormerods (India) Private Limited v. CIT (1959) [36 ITR 329] (Bom.) that interest on monies borrowed from the purpose of purchase of shares is an expenditure allowable u/s 57(iii), whatever may have been the purpose of the purchase of shares, e.g., even to acquire controlling interest in the company.
After the amendment by Finance Act, 2020 w.e.f. A.Y. 2021-22, the above deduction is limited to interest with a cap of 20% of the dividend income. The benefit for claiming deduction is only available to Indian tax residents. This net income is chargeable to tax at slab rate in case of Individuals and the rates as applicable in the case of another assessee. A Non-Resident is subject to special rate of tax of 20% of gross dividend u/s 115A of the Act. However, the surcharge is capped at 15% on this. Hence, no deduction will be allowed in computing income by way of dividends received by a foreign company or a non-resident. 5.4 Dividend income - Foreign Company
5.4.1 Dividend received from a Foreign Company (Receiver Resident Indian) Dividend received from a foreign company is taxable. It will be charged to tax under the head “income from other sources.” 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.
5.4.2 Dividend received by a Foreign Company/Non-Resident (Payer Indian Company)
Dividend Income received by a foreign company from an Indian company is taxable under the ‘head other sources.’ (One exception being dividend is attributable to Permanent Establishment (PE) of foreign company in India). In that case the dividend income may be taxed as Business Income. This will apply to the dividend distributed on or 22
Dividend impact of status
after 1st April, 2020 as prior thereto dividends from Indian Companies were exempt under the domestic law. Section 4 being charge of tax and section 5 being accrual and arising of income in India apply to the taxability of incomes accruing in India if they are in the nature of income u/s 2(28) of the Act. However, non-residents who are outside India are taxable in regard to dividends paid/payable to them by Indian companies regardless of their situs in India as section 9(1)(iv) gets triggered, dividends paid by Indian company outside India. This assures the taxability of dividends based on deemed accrual and arisal in India. (Sections 9(1)(iv) read with 5(2)(b) of the Act.) The tax rate on dividend income will be 20% (plus surcharge and cess as applicable). However, the foreign company can claim the treaty benefits of lower rate of tax on dividends, subject to the conditions mentioned in that treaty between India and the country where Investor Company is tax resident. Section 115A of the Act deals with the provisions related to determination of tax in respect of dividends, royalty and technical fees in the case of non-residents and foreign companies. This would include non-residents, whether Indian Citizens or otherwise. Section 115E is a special provision that applies to non-resident Indians who earn income from specified investments, including long term capital gain. Specified investments are those which have been purchased, acquired or subscribed to in convertible foreign exchange. The rate of tax in both cases is 20% plus the applicable surcharge and cess. 5.4.3 Relief from Double Taxation The taxability of dividend and tax rate thereon shall depend upon residential status of the shareholders, in case of a non-resident shareholder, the provisions of Double Taxation Avoidance Agreements (DTAAs) and Multilateral Instrument (MLI) shall also come into play. As per section 195, the withholding tax rate on dividend shall be as specified in the Finance Act of the relevant year or under DTAA, whichever is applicable in case of an assessee. In case tax on dividend is payable in both the countries by the recipient of the dividend i.e., the country in which the recipient company is incorporated and the country in which recipient is liable for withholding taxes on the dividend income, then tax relief can be claimed under the provisions of double tax avoidance agreements read with Multi-Lateral Instruments MLI). This will avoid double taxation to the recipient. In case there is no such agreement between both the countries, the relief can be claimed as per section 91 of the Act. This means that the taxpayer will not have to pay tax on the same income twice. 23
TAXATION OF DIVIDENDS AUTHOR
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PUBLISHER : DATE OF PUBLICATION : EDITION : ISBN NO : NO. OF PAGES : BINDING TYPE :
Bombay Chartered Accountants' Society, Divya Jokhakar Taxmann November 2025 2026 Edition 9789371267199 72 Paperback
Rs. 385 DESCRIPTION Taxation of Dividends is a concise yet comprehensive reference on the law and practice of dividend taxation under the Income-tax Act 1961. Published under the aegis of the Bombay Chartered Accountants' Society (BCAS), it traces the evolution of dividend taxation in India—from the classical regime to the DDT era and back to shareholder-level taxation post–Finance Act 2020. It covers the full framework of dividend-related provisions, including Section 2(22) (with deemed dividends), Section 8, Section 80M, the erstwhile Sections 115-O and 115BBDA, TDS provisions, anti-avoidance rules, DTAA aspects, and the latest changes on buybacks. Concepts are explained with case laws, examples, CBDT circulars and chapter-wise FAQs to ensure conceptual clarity and practical utility. This book is designed as a definitive professional reference for: • Chartered Accountants, Tax Consultants & Legal Practitioners • Corporate Finance Teams, CFOs & Company Secretaries • Wealth Managers, Investment Advisors & Portfolio Analysts • Students & Academicians • Policy Researchers & Think Tanks The Present Publication is the 2026 Edition, authored by CA. Divya Jokhakar, commissioned by the BCAS and published by Taxmann. The noteworthy features of the book are as follows: • [Historical & Policy Evolution] Outlines the complete timeline of dividend taxation (1961–2025), including the introduction, changes and abolition of DDT, and the return to classical taxation from 1-4-2020 • [Deep Dive into Section 2(22)] Analyses the inclusive definition of dividend, covering: o Distributions out of accumulated profits o Debentures and bonus shares to preference shareholders o Liquidation and capital reduction distributions o Deemed dividends under section 2(22)(e) with illustrations, exclusions and leading case law • [Modern Issues | Buybacks Now Taxed as Dividend (Post–1 Oct 2024)] Explains the shift under section 2(22)(f), covering classification, TDS and treaty issues, and the differing impact on resident and non-resident shareholders • [Characterisation, Head of Income & Deductibility] Clarifies business-income vs. other-sources characterisation and the post–Finance Act 2020 limits on deductions under section 57 • [Tax Rates, Treaty Relief & MLI Framework] Compares domestic rates with DTAA rates, MFN clauses, beneficial ownership tests and PPT under the MLI • [Case-Law Driven Analytical Approach] Synthesises key judicial precedents that shape the principles and practice of dividend taxation • [Practical FAQs] Provides FAQs on chargeability, TDS timing, dividend stripping, interest deductibility, non-resident filing and advance tax
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