The Finance Bill, 2020 has proposed to revive the following sections relating to deduction of tax at source from dividend income:
(a) Section 194:
It provides for deduction of tax at source on distribution or payment of dividend by an Indian Company. The rate for tax shall be 10% and liability to deduct TDS shall arise if the amount of dividend distributed or paid to shareholder exceeds Rs. 5,000;
(b) Section 194LBA:
It provides for deduction of tax at source by business trust on dividend income paid to unit holder. The rate of tax shall be 10% if dividend is paid to resident unit holder. In case of non-resident unit holders, the rate of tax shall be 5% for interest income and 10% for dividend income;
(c) Section 194K:
A new section has been proposed to be inserted in the Act to provide, deduction of tax at source at the rate of 10%, if any person responsible, for paying to a resident, any income exceeding Rs. 5,000:
- in respect of units of a Mutual Fund specified under section 10(23D);
- units from the administrator of the specified undertaking; or
- units from the specified company.
(d) Section 195:
Section 195 of the Act provides for deduction of tax at source from payments made to non-residents. The second proviso to section 195 exempts deduction of tax at source in respect of dividends referred to in section 115-0.
It has been proposed to omit the second proviso to section 195. Thus, dividend income earned by a non-resident shall be governed by the provisions of section 195 and would be subject to withholding tax.
(e) Section 196A:
Currently, no deduction of tax at source is required under section 196A in respect income payable to a non-resident unit holders in respect of units of a mutual fund. The Finance Bill has proposed to shift the incidence of tax on the recipient. Hence, the said TDS exemption under section 196A is proposed to be withdrawn;
(f) Section 196C:
It is proposed to remove exclusion provided to dividend under section 115-0. Thus, any dividends in respect of Global Depository Receipts shall be subject to TDS at the rate of bob; and
(g) Section 196D:
It is proposed to remove exclusion provided to dividend under section 115-0. Thus, any income in respect of securities referred to in clause (a) of sub-section (1) of section 115AD shall be subject to TDS at the rate of 20%.
Impact on Cash Inflow on Dividend Income or Income on Units
Shareholder |
Applicable
tax rate |
Financial Year
2019-20 |
Financial Year 2020-21 (AY : 2021-22) |
Net Benefit /
Loss |
Dividend
received
after DDT
@ 20.55% |
Dividend
Received (Note) |
Tax on
dividend |
Net
inflow
from
dividend |
Mr. A |
5.20% |
1,00,000 |
1,20,555 |
6,269 |
1,14,286 |
14,286 |
Mr. B |
20.80% |
1,00,000 |
1,20,555 |
25,076 |
95,480 |
(4,520) |
Mr. C |
31.20% |
1,00,000 |
1,20,555 |
37,613 |
82,942 |
(17,058) |
Mr. D |
34.94% |
1,00,000 |
1,20,555 |
42,127 |
78,428 |
(21,572) |
Note :
Assuming that the portion of distributable profit which was utilized for payment of DDT (till the financial year 2019-20) shall be distributed among shareholders. Thus, more dividend income shall be paid to the shareholders. If other conditions remain the same, the same shareholder would now get a dividend of Rs.1,20,556 viz-a-viz Rs. 1,00,000. |