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The taxation of dividends has seen several twists and turns over the years. In order to reduce the cost of collection and curb tax evasion through non-reporting of dividends by shareholders, the Government had introduced section 115-O in the Income-tax code through Finance Act, 1997. The section presently provides for a 15% tax on dividends distributed by a domestic company. After considering grossing up, surcharge, and cess, the effective rate of dividend distribution tax (‘DDT’) stands at approximately 20%.
Finance Bill, 2016 has introduced a concept of progressive taxation of dividends. Proposed section 115BBDA seeks to tax dividends in excess of INR 1 Million @ 10% (plus surcharge and cess) in the hands of individuals, HUFs, partnership firms, and LLPs resident in India.
However a indian company which has declared, & distributed dividend or paid as a dividend is needed to make the pay a dividend distribution tax (DDT) at 15%. Finance Act, 1997 has been introduced this DDT provision. Only a domestic company is liable for the dividend distribution tax (DDT) at 15%.
Foreign dividends have a different tax treatment than domestic dividends. Domestic dividend income was previously tax-free in the hands of shareholders.
Dividend income is now taxable in the hands of the shareholder, and is subject to TDS at 10% in excess of INR 5000 u/s 194 & 194K, following the introduction of Budget 2020. Slab rates apply on foreign dividends. Such dividends are exempt from TDS.
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