Before starting with the changes in dividend let’s understand the meaning of dividend as per Income Tax Act:
(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails the release by the company to its shareholders of all or any part of the assets of the company ;
(b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in any form, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus, to the extent to which the company possesses accumulated profits, whether capitalised or not ;
(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not ;
(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before the 1st day of April, 1933, whether such accumulated profits have been capitalised or not ;
(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ;”
In simple layman language we can say dividend as distribution of profit after taxes of company or accumulated reserves to the owners or shareholder of the company.
Now since it’s an after tax item of company, hence people might think that such dividend would be tax free in the hands of shareholders as is in case of partnership firm.
But that’s not the case, dividend distributed by company is taxable and this is a classic example of double taxation where tax is again levied on an income on which tax has been already paid.
Before Budget 2020, dividend was liable to DDT i.e. dividend distribution tax wherein the rate of tax was fixed at gross 20.56% whether you earn Rs. 100 dividend or Rs. 100000 dividend from a company. Hence, all the investors were at equal footing.
Later an additional tax was introduced for high dividend earning individuals under section 115BBDA at the rate of 10% if the total dividend earned exceeded Rs. 10 lakh.
However, after Finance Act, 2020 DDT has been scrapped on any dividend distributed, announced or paid after 01.04.2020 and such dividend would be taxable in the hands of the recipient.
Further the company while paying dividend has to deduct TDS u/s 194 at the rate of 10% if the total amount of dividend is above Rs. 5,000.
Since dividend has been made taxable in the hands of recipient this is going to mostly affect HNI (High net worth individuals) who are either investing in stock market or are owners of big company and earlier used to just pay 20.56% on such dividend might now have to pay 30-40% tax on such dividend.
Hence after such amendment many private companies will think twice before paying dividend and would rather try to distribute dividend as a salary or commission to the director who is also a shareholder and it can get some benefit with this in the sense that dividend and such commission would get taxable at same rate in hands of recipient but on the other hand the company will atleast get deduction of such commission paid as compared to dividend where it is an after tax item.
Thus, paying the amount as commission or salary will save some tax as compared to distributing the same as dividend.
However this will apply only in case of private company.
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