Dividend Income and Taxability

Dividend is the payments made by a company to its shareholders or members out of the profit earned by the company. The company is liable to pay dividend distribution tax @ 12.5% in respect of dividend so declared. So, such dividend is exempt from tax in the hands of the shareholders to avoid the double tax treatment.

Dividend includes any distribution by company of accumulated profits, whether capitalized or not,
• if such distribution entails the release by the company of all or any part of the assets of the company.
• to its preference shareholders by way of bonus, to the extent to which the company possesses accumulated profit.
• on liquidation of company to the extent it is attributable to the accumulated fund immediately before liquidation.
• on the reduction of its capital to the extent company possesses accumulated profit.
• And, any payment by a private company of any sum by way of loans & advances to its shareholder, being a beneficial owner of the shares or to any concern in which he has a substantial interest or any payment by the company on behalf of such shareholder for the individual benefit, to the extent the company possesses accumulated profit is termed as deemed dividend.

The dividend so declared by the domestic company shall be exempt from tax in the hands of shareholders u/s 10(34) of the Income Tax Act, 1961. But this provision is not applicable to foreign company and deemed dividend. Dividend declared by foreign company and any deemed dividend is chargeable to tax and shareholders are liable to pay tax on such dividend. Dividend is chargeable to tax in the year such amount is paid to the shareholders.
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