Taxability of Dividends under Section 56(2)(i) as “Income from Other Sources”

Here’s a detailed explanation of the taxability of dividends under Section 56(2)(i) as “Income from Other Sources” under the Income Tax Act, 1961:

1. Scope of Section 56(2)(i)

Section 56(2)(i) mandates that dividend income received by taxpayers (individuals, HUFs, firms, etc.) is taxable under the head “Income from Other Sources” unless exempt under other provisions. This includes:

• Dividends from domestic companies(post-abolition of Dividend Distribution Tax (DDT) in 2020).
• Dividends from foreign companies(always taxable).
• Income from unitsof Mutual Funds, UTI, or specified undertakings.

Exception: Dividends from companies where the public is “substantially interested” (holding ≥20% voting power) may be exempt under certain conditions.

2. Tax Treatment of Dividends

• Tax Rate:
  • For individuals/HUFs: Taxed at applicable slab rates(e.g., 5%–30% + cess).
  • Dividends exceeding ₹10 lakh: Additional 10% taxunder Section 115BBDA (for resident individuals/HUFs/firms).
• TDS:
  • 10% TDSif dividend exceeds ₹5,000 (₹10,000 from FY 2025-26).
  • No TDS if the recipient submits Form 15G/15H (for tax-exempt individuals).

3. Deductions Allowed

• Interest Expense Deduction: Up to 20% of dividend incomecan be claimed under Section 57(iii) for interest paid to earn dividends (e.g., loan interest for investments).
• No Other Deductions: Expenses like commission or administrative costs are not deductible.

4. Key Points to Note

• Reporting in ITR: Dividends must be declared in Schedule OSof ITR-2/ITR-3, even if TDS is deducted.
• Exempt Dividends:
  • Dividends from Indian companies (if DDT was paid pre-2020).
  • Dividends exempt under Section 10(34) (e.g., from certain government securities).
• Foreign Dividends: Always taxable; eligible for relief under DTAA (Double Taxation Avoidance Agreement).

5. Example

If Mr. A receives ₹1,00,000 as dividends from an Indian company:

• Taxable Income: ₹1,00,000 under “Income from Other Sources.”
• TDS: ₹10,000 (if no Form 15G/15H submitted).
• Net Tax Liability: Slab rate on ₹1,00,000, minus TDS credit.

Penalties for Non-Disclosure

Failure to report dividends may attract:

• Scrutiny noticesunder Section 143(1).
• Interestunder Sections 234A/B/C for underreporting