Relief in Dividend Income as per Budget 2021

Under Budget 2020, the Union Finance Minister Nirmala Sitharaman had announced that the Dividend Distribution Tax, commonly known as DDT, will be abolished. Since DDT was abolished, Dividend Income which was earlier an exempt income, now became taxable. As a result, the FM also introduced a new TDS Section 194K (TDS on Dividend from Equity Mutual Funds) and amended the existing Section 194 (TDS on Dividend from Equity Shares) for deduction of TDS if such dividend income exceeds INR 5,000 during the financial year.

Changes in Budget 2021 for Dividend Income

No Advance Tax on Dividend Income (Applicable from 01/04/2021 i.e. AY 2021-22)

Payment of advance tax has now become easier and would save late payment interest for the taxpayers. Under Budget 2021, the Finance Minister proposed that the advance tax liability on dividend income shall arise only after the dividend is declared or paid.

As per Section 234C of the Income Tax Act, if a taxpayer fails to pay advance tax, interest is applicable at the rate of 1% per month. Earlier, it was very difficult for the taxpayer to estimate the dividend income which thus resulted in unnecessary interest liability under Section 234C (the penalty for delay in advance tax payment). 

Under Budget 2021, this section has been amended by introducing a provision that interest under Section 234C should not be calculated if it is not possible to accurately determine the advance tax due to intrinsic nature of income. As per the new provision, the liability to pay advance tax would arise only when the dividend is declared or paid. This makes the payment of advance tax easier for the taxpayers.

No TDS on Dividend to REIT / InvIT – Applicable retrospectively from 01/04/2020 i.e. AY 2020-21)

TDS under Section 194 of the Income Tax Act is required to be deducted on payment of dividend to a resident. This section has been amended by introducing a provision that TDS should not be deducted for the dividend paid to a business trust by a special purpose vehicle or any other notified person.

Therefore, to provide an ease of compliance, the dividend paid to REIT (Real Estate Investment Trusts) and InvIT (Infrastructure Investment Trusts (InvIT) is exempt from TDS. Thus, even if the dividend on equity shares or equity mutual funds exceeds INR 5,000 during the financial year, TDS is not required to be deducted on such payment. The idea behind removing this provision is to rationalise the taxation of dividends and attract more investment.

In addition to the above changes, the Finance Minister also proposed to enable deduction of TDS on dividend paid to Foreign Portfolio Investors at lower treaty rate instead of the normal TDS rates.

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