Dividend Taxation

Section numbers here are from the Income tax Act, 1961, the operative law for the current filing cycle. This article is for general information and does not constitute tax advice.

Who pays the tax, and at what rate

Dividend Distribution Tax was abolished with effect from FY 2020-21. Since then the company pays nothing on distribution, and the dividend is taxed in the hands of whoever receives it, under Income from Other Sources.

Recipient	Rate on dividend from an Indian company
Resident individual or HUF	Slab rate, plus surcharge and cess. Surcharge on dividend is capped at 15%.
Domestic company	Its own applicable corporate rate, subject to the cascade relief below
Firm or LLP	30%, plus surcharge and cess
Non-resident (individual or company)	20% gross under Section 115A, plus surcharge (capped at 15%) and cess, unless a treaty gives a lower rate

A point worth noticing, because it runs against most people’s intuition: a non-resident often pays less Indian tax on the same dividend than a resident does. A foreign company lands near 21.84% at the top surcharge band, against roughly 34.94% for a domestic company on the regular regime, before any treaty relief. That is a function of Section 115A applying a flat 20% to the gross amount rather than the ordinary rate.

TDS on dividend

The company deducts 10% TDS under Section 194 once dividend payments to a resident shareholder cross 10,000 rupees in a financial year. That is a withholding, not a final tax. If your slab rate is 30%, the remaining tax is yours to pay through advance tax or at filing, and a shareholder who assumes the 10% deduction settled the matter is heading for an interest demand.

For a non-resident, withholding is under Section 195 at the rates in force, and the treaty rate can be applied at source where the shareholder furnishes a Tax Residency Certificate and the prescribed declaration. Getting that paperwork to the company before the record date is what avoids a refund claim later.

Cascade relief where a company receives dividend

Without relief, a dividend passing up a holding structure would be taxed at every tier. A domestic company that receives dividend and itself distributes dividend can claim a deduction for the amount so redistributed, provided the onward distribution happens by the prescribed date, which is one month before the due date for filing its return. The deduction is capped at the dividend received, so it neutralises the pass-through rather than creating a benefit. Holding companies that declare late lose it entirely, which makes the timing a real planning point rather than a formality.

Deemed dividend: when a loan from your own company is taxed as one

This is the provision that catches closely held companies most often. Where a company in which the public is not substantially interested advances a loan or makes a payment to a shareholder holding at least 10% of the voting power, or to a concern in which that shareholder has a substantial interest, the amount is treated as deemed dividend to the extent of the company’s accumulated profits.

In practice this means a director’s current account that runs overdrawn, or an interest-free advance from one group company to another with common substantial shareholding, can be reclassified as dividend and taxed in the shareholder’s hands, even though nobody declared a dividend and the money was always intended to be repaid. Repaying it later does not undo the charge for the year in which it arose. Accumulated profits are the ceiling, so a company with no reserves is outside the provision.

The company-side rules on declaring dividend

Section 123 of the Companies Act restricts dividend to being declared only out of current profits after depreciation, or out of accumulated past profits in specific circumstances. Capital cannot be distributed as dividend. An interim dividend needs only a board resolution; a final dividend needs AGM approval.

Unpaid dividend moves to an Unpaid Dividend Account within 30 days, and to the Investor Education and Protection Fund if it remains unclaimed for seven years from that transfer. Money that reaches the IEPF is not lost, it can still be reclaimed through a specific application, but the process is slow and the shares themselves are transferred to the IEPF alongside the dividend, which surprises shareholders who assumed only the cash moved.