DIVIDEND AND TAX TREATMENT

 Dividend Income

1. Meaning of Dividend

A dividend is a share of the after-tax profits of a company which is distributed to its shareholders.

  • Legal Basis: It is usually proposed by the Board of Directors and approved by the shareholders in the Annual General Meeting (AGM).
  • Source: It is paid out of the accumulated profits of the company.
  • Form: It is generally paid in cash, but can also be issued as additional shares (Bonus shares).

2. Types of Dividend

Dividends can be categorized based on timing and the nature of the distribution:

A. Based on Timing

  1. Interim Dividend: Declared and paid by the Board of Directors during the financial year, before the final accounts are prepared.
  2. Final Dividend: Declared at the Annual General Meeting (AGM) after the close of the financial year and the finalization of accounts.

B. Based on Share Type

  1. Preference Dividend: Paid to preference shareholders at a fixed rate before any dividend is paid to equity shareholders.
  2. Equity Dividend: Paid to equity shareholders from the remaining profits. The rate is not fixed and varies every year.

C. Deemed Dividend (Section 2(22))

In Indian Tax Law, certain payments by a company are "treated" as dividends even if they aren't officially declared as such:

  • 2(22)(a): Distribution of accumulated profits entailing release of assets.
  • 2(22)(b): Distribution of debentures or deposit certificates to shareholders.
  • 2(22)(c): Distribution made to shareholders on liquidation of the company.
  • 2(22)(d): Distribution on the reduction of capital.
  • 2(22)(e): Loans or advances given by a closely held company to a substantial shareholder (holding 10% or more voting power). This is a very important "deemed dividend" provision to prevent tax evasion.

 3. Tax Treatment of Dividend

Since the Finance Act, 2020, the tax treatment of dividends has changed significantly in India:

  • Dividends are now fully taxable in the hands of the shareholder.
  • The "Dividend Distribution Tax" (DDT) previously paid by companies has been abolished.
  • Head of Income: It is taxed under the head "Income from Other Sources" (IFOS)

  • Practical Sum 1:

  •            Raja furnishes the following particulars of his income for the previous year 2024-25.Compute his Income From Other Sources for the assessment year 2025-26

     

     

    a)     Dividend(gross) from Essar Ltd

    25,000

    b)     Divident from a co-operative society

    5,000

    c)     Interim dividend from MRF Ltd.

    6,000

    d)     Dividend from a foreign company

    26,000

    e)     Dividend from Mutual fund

    3,000

     

    Solution:

               

     

     

    a)     Dividend(gross) from Essar Ltd

    25,000

    b)     Divident from a co-operative society

    5,000

    c)     Interim dividend from MRF Ltd.

    6,000

    d)     Dividend from a foreign company

    26,000

    e)     Dividend from Mutual fund

    3,000

                                                                            Total

    65,000

     

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