Income Tax Liability on Shareholding: All you need to know about DDT and other Tax Implications

Nature of Investments in Shares:

The investments in shares are treated as capital assets. Both capital gains and dividends from shares are taxable in the hands of investors.

Up to the Assessment Year 2020-21, if a shareholder gets dividend from a domestic company then he shall not be liable to pay any tax on such dividend as it is exempt from tax under Section 10(34) of the Income Tax Act, 1961.

Dividend Distribution Tax (DDT):

However, in such cases, the domestic company was liable to pay a Dividend Distribution Tax (DDT) under section 115-O. The Finance Act, 2020 has abolished the DDT and moved to the classical system of taxation wherein dividends are taxed in the hands of the investors.

Section 115-O shall not be applicable if the dividend is distributed on or after 01-04-2020. Thus, if the dividend is distributed on or after 01-04- 2020, the domestic companies shall not be liable to pay DDT and shareholders shall be liable to pay tax on such dividend income. Consequently,  Section 115BBDA which provided for taxability of dividend in excess of Rs. 10 lakh has no relevance now as the entire amount of dividend shall be taxable in the hands of the shareholder.

The domestic companies shall not be liable to pay DDT on dividend distributed to shareholders on or after 01-04-2020. However, domestic companies shall be liable to deduct tax under  Section 194 of the Income Tax Act.

Nature of Income from Securities:

A person can deal in securities either as a trader or as an investor. The income earned by him from the trading activities is taxable under the head business income.

Thus, if shares are held for trading purposes then the dividend income shall be taxable under the head “business or profession”. Whereas, if shares are held as an investment then income arising in nature of dividend shall be taxable under the head of “other sources”.

Interim, Deemed and Final Dividends:

Section 8 of the Income Tax Act provides that final dividend including deemed dividend shall be taxable in the year in which it is declared, distributed or paid by the company, whichever  is earlier. Whereas, an interim dividend is taxable in the previous year in which the amount of such dividend is unconditionally made available by the company to the shareholder. In other words, an interim dividend is chargeable to tax on receipt basis.

Residential Status of Shareholder:

Where the dividend is distributed to a non-resident shareholder, the tax shall be required to be deducted as per section 195 of the Income-tax Act. However, where the dividend is distributed or paid in respect of GDRs of an Indian Company or Public Sector Company (PSU) purchased  in foreign currency or to Foreign Portfolio Investors (FPIs), the tax shall be required to be deducted as per Section 196C and Section 196D of the Income Tax Act, 1961.

It has also been held that payment for buy-back of shares from NRI is not dividend and

Advance Tax:

No interest under Section 234C shall be charged for the failure to pay the ad on time on account of dividend income, provided the assessee has paid full tax in subsequent advance tax installments.

Tax Liability on Holding Shares:

The liability to pay tax on investments arises when shares are sold. Unless such profits from shares are realized, shares cannot be taxed. Even the basic liability to file an Income Tax Return (ITR) arises only when the taxable income from all sources including profits on investments have exceeded the limit of basic exemption, after all the deductions.

Even if the valuation of shares have gone up substantially, as a shareholder no tax liability arises for the assessee.

Deductions:

Brokerage or expenditure incurred in connection with sale of assets are deductible along with the indexed price of asset as multiplied by the Cost-Inflation Index (CII).

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