This article will clarify and summarize the most relevant amendments related to Dividend and Interest on securities from income tax perspective, made by Finance Act 2020. Unless otherwise notified, all the amendments are to be effective for the assessment year 2021-22, starting from 1st April, 2020, relating to the income of the financial year 2020-21. The amendments are made either by omitting existing sections or by insertion/updation/amending of new sections.
Amended provisions-Dividend Received from an Indian Company
The dividend obtained from an Indian company was released until March 31, 2020 (FY 2019-20). That is because the company that announced such an allocation would have already paid its shareholding tax (DDT) before paying. However, the Finance Act, 2020 has changed the tax system for dividends. From now on, all benefits received on or after 1 April 2020 are taxable at the hands of the investor / shareholder. DDT credit on companies and joint ventures is excluded. Similarly, 10% tax on segregation of residential grants, HUF and firms of more than Rs 10 lakh (Section 115BBDA) is also levied. Finance Act, 2020 also places TDS on the distribution of shares by companies and joint ventures on or before 1 April 2020. However, as a measure of COVID-19 assistance, the government has reduced the TDS rate to 7.5% for distribution from 14 May 2020 to 31 March 2021. For example, Mr. Alok received a share of Rs 6,000 from an Indian company on 15 June 2020. As his share exceeds Rs 5,000, the company will deduct TDS @ 7.5% from a dividend of Rs 450. Mr. Alok will receive a balance amount Rs 5,550. In addition, the income tax is Mr Ravi’s taxable income taxable slab rates applicable to FY 2020-21 (AY 2021-22). The Finance Act, 2020 also provides for deductions from interest earned on the allocation. Deductions should not exceed 20% of revenue. However, you do not have the right to claim a deduction for any other expenditures received in order to earn income. In the example above, if Mr. Alok borrowed money from investment stocks and paid interest of Rs 2,700 during FY 2020-21, only Rs 1,200 is allowed as interest reduction.
Dividend Received from Foreign Company
Dividend received from a foreign company is taxable. It is charged to tax under the head “income from other sources.” Dividend obtained by an overseas company will be included in the taxpayer’s full salary and will be taxed at the rates applicable to the taxpayer. For example, if a taxpayer comes up in 30% tax slab rate, then that benefit will be taxed at 30% plus cess. Even if there is a foreign dividend, an investor may require a deduction only for interest costs limited to 20% of total net income.
Section 194: TDS on Dividends
The rate of TDS is 10%. Corporate enterprise distributing dividend is liable to deduct TDS on dividend distributed either in cash or cheque, etc. If such dividend paid is more than Rs.5000 (earlier limit was 2500)
Section 194A: TDS on interest other than interest on securities
Keeping other things same as mentioned already in the section, Applicability for Individual and HUF (payer) is changed as under –
If an Individual or HUF is having business turnover more than Rs. 1,00,00,000/- in the financial year immediately preceding the financial year in which such amount liable for TDS is paid or credited & If an Individual or HUF is having professional receipts more than Rs. 50,00,000/- in the financial year immediately preceding the financial year in which such amount liable for TDS is paid or credited, is required to deduct TDS.
The scope of section 194A to deduct tax at source in respect of payment of interest is being widened in respect of the Cooperative Societies. If the total sales, gross receipt or turnover of the Cooperative Society exceeds Rs. 50 crore during the financial year immediately preceding the financial year and the amount of interest to be credited or paid during the financial year is more than Rs. 40,000 in the case of such cooperative society, the cooperative society shall be required to deduct tax at the rate of 10% in case the amount of interest credited or paid or likely to be credited or paid during the financial year. However, in the case of the senior citizen, the tax shall be required to be deducted at source in case this amount is more than Rs. 50,000/-
Section 194K: TDS in respect of units
– Any person responsible for paying to a resident any income in respect of Units,
– Shall deduct TDS at the rate of 10%
– If any sum paid is more than Rs. 5000/-
The above TDS provisions will apply from financial year 2020-21 and have to be deducted by the concerned person making a specified payment with respect to Dividend and Interest on Securities at specified rates, if the payment exceeds a certain threshold.
Dr. Niti Saxena
Post:Associate Professor
Jims Kalkaji
