Understanding of Section 56(2)(i)
In India, the taxation of dividends is governed by the provisions of the Income Tax Act, 1961. Section 56(2)(i) of the Act specifically deals with the taxability of dividends received by individuals and other entities. It is important for taxpayers to understand the implications of this section in order to comply with their tax obligations and avoid any potential penalties or legal issues.
According to Section 56(2)(i), any sum of money, including the value of any property, received by an individual or a Hindu Undivided Family (HUF) without consideration, is considered as income and is subject to tax under the head ‘Income from Other Sources’. This includes dividends received from companies, whether they are resident or non-resident in India.
Dividends can be of three types:
(a) Dividends declared by a domestic company.
(b) Dividends or any other income distributed by Unit Trust of India.
(c) Dividends declared by a foreign company.
Any amount declared, distributed or paid by a domestic company by way of dividends (whether interim or otherwise) whether out of current or accumulated profits shall be included in computing the total income of a previous year of any person. Hence, dividends shall be taxable in the hands of the shareholders.
Dividend from a foreign company shall also be taxable under the head “Income from Other Sources”.
Similarly, any income received in respect of—
(a) units from the Administrator of the specified undertaking, or
(b) the specified company, or
(c) a Mutual Fund specified under clause (23D),
shall also be taxable.
However, there are certain exceptions to the taxability of dividends under Section 56(2)(i). The section does not apply to dividends received from a company in which the public is substantially interested. A company is said to be substantially interested if it holds 20% or more of the voting power in the company. Dividends received from such companies are exempt from tax under this section.
Another important aspect to consider is the tax rate applicable to dividends under Section 56(2)(i). Dividends received by individuals and HUFs are subject to tax at the applicable slab rates. This means that the tax liability on dividends will vary depending on the total income of the recipient.
For example, if an individual’s total income falls in the 20% tax slab, the dividends received by that individual will also be taxed at 20%. Similarly, if an HUF’s total income falls in the 30% tax slab, the dividends received by the HUF will be taxed at 30%.
It is important to note that the taxability of dividends under Section 56(2)(i) is separate from the tax deducted at source (TDS) provisions applicable to dividends. When a company distributes dividends, it is required to deduct TDS at the rate of 10% if the amount of dividend exceeds Rs. 5,000 in a financial year. The TDS deducted by the company is credited to the recipient’s tax account and can be adjusted against the final tax liability.
However, it is the responsibility of the recipient to include the full amount of dividend received in their income tax return and pay any additional tax, if applicable, based on their tax slab. Failure to do so can lead to penalties and legal consequences.
Key Points regarding the Taxability of Dividend U/s 56(2)(i)
Here are the key points regarding the taxability of dividend income under this section:
This provision applies to individuals, HUFs, and firms, among others, who receive dividend income. It does not apply to companies, as dividend distribution tax (DDT) was applicable to companies distributing dividends.
As of my last update, dividend income received by individuals and HUFs is generally taxable at a flat rate of 10%. This rate is exclusive of any applicable surcharge and cess.
As per the provisions of Section 56(2)(i), dividend income received by an individual or HUF exceeding Rs. 10 lakh in a financial year is taxable. Any dividend income below this threshold is not subject to tax.
Taxpayers are required to report dividend income in their income tax returns and disclose the details of the dividend income received during the financial year.
Certain dividends, such as those received from Indian companies on which dividend distribution tax (DDT) has already been paid, may be exempt from tax in the hands of the recipient. However, the taxation of dividends has undergone significant changes, including the abolition of DDT for companies and the introduction of the Dividend Income Tax (DIT) in the hands of the recipients. Therefore, it’s essential to refer to the latest tax rules and notifications to determine the exact tax treatment of dividend income.
Dividend Distribution Tax (DDT):
Before the changes in the taxation of dividends, companies were liable to pay DDT on the dividends they distributed to shareholders. However, with the abolition of DDT, the taxation of dividends shifted to the recipients, i.e., individuals, HUFs, and other entities.
TDS (Tax Deducted at Source):
As per Section 194 of the Income Tax Act, companies are required to deduct TDS at the rate of 10% on dividend payments exceeding Rs. 5,000 to individual shareholders. The TDS deducted can be adjusted against the final tax liability of the shareholder.
No deduction shall be allowed from dividend income, or income in respect of units of mutual fund specified under section 10(23D) or specified company, other than deduction on account of interest expense and in any previous year such deduction shall not exceed 20% of the dividend income or income from units included in the total income for that year without deduction under section 57.
Gross dividend minus the above deductions is the income from dividend taxable under the head ‘Income from Other Sources’.