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‘TDS Provisions’ applicable on Distribution of ‘Dividend Income’ or ‘Income on Units’ from Assessment Year 2021-22

[Sections 194, 194LBA, 194K, 195, 196A, 1 96C, 196D]

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 Hence, the said TDS exemption under section 196A is proposed to be withdrawn;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.
 
Dividend Distribution Tax (DDT) is Abolished from Assessment Year 2021-22 Tax Amendments in Finance Bill 2020 Amendment and Benefit to eligible ‘Start-Ups’ under Finance Bill 2020 (Applicable from Assessment Year 2021-22)
Income Tax Slab for Financial Year 2020-21 (AY : 2021-22)

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