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Section 10(34) – Income Tax Exemption on Dividend Income

Last Update Date : April 23, 2018

Tired of paying taxes? Not always you need to pay tax on your income. Some incomes are still tax-free. Let’s take a ride on how your dividend income is exempt from tax if received from a domestic company. Section 10(34) allows tax exemption on the dividend income as it is taxed while declaration or distribution by the domestic company as Dividend Distribution Tax.

Section 10(34)

What is Tax Exemption under Section 10(34) of the Income Tax Act?

According to section 10(34) of the Income Tax Act, 1961, dividend received from a domestic company is exempt in the hands of the shareholders provided such dividend has already suffered Dividend Distribution Tax (DDT) under section 115-O. However, for a domestic company or a trust or institution registered under section 12A or section 12AA, the dividend is chargeable to tax under section 115BBDA at the rate of 10% if the aggregate amount of dividend received from a domestic company exceeds ₹ 10 lakhs.

Dividend income received from a foreign company is however added to the total income of the assessee under the head “Income from Other Sources” and chargeable to tax at the respective slab rate applicable to the assessee. However, in case of an assessee being a domestic Company, foreign dividend is chargeable to tax at a concessional rate of flat 15% (plus applicable surcharge and cess) under section 115BBD provided the domestic or Indian company holds more than 26% of the nominal equity capital of the said foreign company. It should be noted that the flat rate shall be applied on the gross value of the dividend received and no deduction of expenditure in respect to such dividend shall be allowed.

What is a Dividend?

In general sense, a dividend is referred to as the distribution of the current or accumulated profits to the shareholders of a company. The dividend also includes deemed dividend as defined under section 2(22)(e) of the Income Tax Act, 1961. As per section 2(22)(a) to section 2(22)(d) divided includes:

  • a) Distribution of income followed by the sale of all or any part of the asset of the company.
  • b) Distribution in the form of debentures, debenture stock, or deposit certificates, which may be with or without interest, and any distribution in the form of bonus to its preference or equity shareholders.
  • c) Distribution made out of the surplus at the time of liquidation except in the cases where the shareholders are not entitled to such surplus.
  • d) Distribution on the reduction of capital of the company.
  • e) Payments in the form of loans or advances made by a closely-held company (where the public is not substantially interested) to its members or partners having shareholding or voting rights of not less than 10% and advance is made for the individual benefit. However, such advance would not be considered as a dividend if it is made in the ordinary course of business or money lending is the part of the business.

A dividend does not include:

  • Payment by the company to purchase its own shares (buy-back).
  • Distribution by the resulting company in case of demerger.
  • Dividend paid by the company to set off against whole or part of the sum which was previously paid and taxed under section 2(22)(e) considering it to be deemed dividend.

Why is the Dividend Income Exempt?

In India, we always have earned less and paid more. And that is how we had always find ways to escape from the same. This section was introduced in order to charge the tax on dividend income which usually was not declared while filing returns. In order to ensure proper tax collection on the dividend, section 115-O came into force. Also, dividend income from a domestic company is exempt in the hands of the shareholders for a simple reason of avoiding double taxation. The domestic company is liable to Dividend Distribution Tax (DDT) at the time of either declaration, distribution or payment of dividend, whichever is earlier under section 115-O which makes it exempt for the recipients.

For example, a domestic company having 10 shares is planning to pay a dividend of ₹ 200 and the applicable rate of DDT is say 15%. The company after paying the tax @ 15%, i.e. ₹ 30 will be now able to pay the dividend of ₹ 170 only. The shareholders are paid ₹ 1.7 per share as dividend after being taxed instead of ₹ 2 per share. Hence, they are exempt from tax.

Just like dividend income, there are several other types of income which are exempt from tax under section 10 of the Income Tax Act. The tax experts at H&R Block India can help you file your tax return accurately so that you can optimise your tax savings legally.

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