Understanding Corporate Dividend Tax & Its Implications in 2025 

Corporate dividend tax has undergone certain changes since the financial year 2020-21. Prior to this, domestic companies used to pay dividend distribution taxes. 

However, the burden of tax has now shifted to the shareholders. When a company earns a profit, it can choose to share a portion with its shareholders as dividends. Corporate dividend tax refers to the tax imposed on these dividends. Learn in detail about this tax, tax rate, due date and advanced tax liability here to comply with the tax laws in India.

What Is Corporate Dividend Tax?

When a company earns a profit and accumulates retained earnings, it mainly has 2 options, either reinvest the earnings into the business for growth and expansion or distribute them to its shareholders as dividends. The amount distributed as dividends is subject to taxation, which is referred to as corporate dividend tax.

Corporate Dividend Tax Rates

Here are the tax rates applicable to dividend income:

Taxability of Corporate Dividends

The dividend is treated as the shareholder's income for the financial year in which it is paid, distributed or declared, under Section 8 of the Income Tax Act, 1961. Interim dividends are taxable when such dividends are available to the shareholders of a specific company.

Here is the tax treatment on corporate dividends based on the person’s role:

• Stock Trader: Dividend income is taxed under the provisions of Profit and Gains from Business or Profession (PGBP) if you are a stock trader. If you are an investor, it is taxed as ‘Income from Other Sources’ as per the Income Tax Act.
• Non-resident Shareholder: If a non-resident Indian invests in an Indian company, the dividend is taxable as ‘Income from Other Sources’ under the provisions of DTAA (Double Taxation Avoidance Agreements) and Multilateral Instruments (MLI).
• Resident Shareholder: Based on whether the individual is a stock trader or an investor, the dividend income is subject to taxation as per points 1 and 2.

Pre-Amendment Taxability

Till the financial year 2019-20, that is 31st March 2020, the domestic dividend-paying companies had to pay dividend distribution tax under Section 115-O of the Income Tax Act. On the other hand, shareholders receiving such dividends from an Indian company were exempt from taxation under Section 10(34) of the same Act.

Post-Amendment Taxability

After the financial year 2020-21, that is from 1st April 2020, Section 115-O was not applicable to domestic dividend-paying companies. Nevertheless, domestic companies are liable to deduct tax on the dividend amount at a specific rate, under Section 194 of the Income Tax Act, 1961. On the flip side, if a shareholder receives a dividend from a foreign company, Section 91 applies for taxation. 

Tax Deduction at Source - Section 194 and 196C

Companies paying dividends to equity shareholders need to deduct TDS (Tax Deducted at Source) under Section 194 of the Income Tax Act. If the total dividend earned during a financial year is more than ₹5,000 for a resident shareholder, the applicable TDS rate is 10%. 

For a non-resident shareholder, the TDS rate is 10% under Section 196C. If the shareholder's PAN details are unavailable, a 20% TDS deduction applies. TDS needs to be deducted before dividend payment to the respective shareholders. 

TDS Payment Due Date 2025

Here are the last dates for TDS payment:

• For all months except March, the due date is the 7^th of the next month.
• If you are paying TDS for March, the due date is 30^th April.

Inter-corporate Dividend

Section 80M of the Income Tax Act states that inter-corporate dividends shall be deducted from a company’s total income if the same is redistributed to shareholders at least one month before the due date for filing the return. This provision aims to prevent double taxation when one domestic company receives dividends from another. 

On the other hand, if a domestic company receives a dividend from a foreign company, wherein the former holds at least 26% of the equity share, the dividend rate is 15% in addition to Surcharge and Health and Education Cess under Section 115BBD.

If the domestic company holds less than 26% equity in the foreign company, the dividend is taxed at the normal corporate tax rate applicable to the domestic company. As a result, the domestic company has the provision to raise a deduction claim for the expenses they incur on earning dividend income.

Advance Tax and Dividend Income

Advance tax provision applies to individuals with a total tax liability of at least ₹10,000 during a particular financial year. If you do not pay the advance tax liability fully or partially, it will likely attract penalties and interest.

If there is a shortfall or delay in the payment of advance tax due to dividend income, no interest under Section 234C will be levied, provided the taxpayer pays the full tax liability in the subsequent advance tax instalments. However, this benefit does not apply to deemed dividends under Section 2(22)(e). 

Submission of Form 15G and Form 15H

Section 197 of the Income Tax Act, 1961 allows nil TDS deduction for individuals with annual income below the tax exemption threshold. A non-senior citizen can submit Form 15G to claim nil deduction while a senior citizen can claim Form 15H to avoid TDS deduction. Notably, a non-resident individual needs to submit Form 13 to the Jurisdictional Income Tax Authority to claim nil deduction. 

Double Taxation Relief Under Section 91 for Tax on Dividends by Foreign Companies

When you receive dividends from foreign companies, it is subject to taxation in India as well as the concerned foreign country, leading to double taxation. However, the Indian Government allows you double taxation relief wherein you can claim this relief under the provisions of the Double Tax Avoidance Agreement (DTAA). 

This is an agreement that the Indian Government signs with foreign governments. Alternatively, if this agreement is unavailable, you can claim relief under Section 91 of the Income Tax Act. Here is the process to compute double tax relief under Section 91:

Step 1: Evaluate the tax payable in India.

Step 2: Compare the tax rate in India in accordance with the Income Tax Act, 1961 and the foreign tax rate.

Step 3: Multiply the lower tax rate with the income that is double taxed.

Step 4: You will derive the tax relief amount which you can claim as a shareholder.

Usually, the rate of corporate dividend tax in the country of origin ranges between 5% and 15% of the gross dividend amount. If a company holds around 25% share in the dividend-paying company, as per DTAA, the tax rate is reduced to lower levels. 

Notably, there is no specific time limit for shareholders to hold the shares with the concerned company. This often leads to misuse of the provision, wherein MNCs (Multinational Corporations) tend to increase their shareholding immediately before dividend declaration. In addition, MNCs tend to reduce their shareholding after dividend declaration. 

Final Word

Corporate dividend tax rates differ significantly for non-resident and resident shareholders. In addition, the tax treatment varies based on whether the dividend receiver is a stock trader or investor in India. 

The tax rates further differ based on the fact that the individual receives a dividend from a domestic or foreign company. Ensure you are aware of the different applicable tax rates on dividend income to adhere to Indian tax laws and DTAA agreements with foreign countries like Singapore, Canada, Denmark and others.

Besides dividend income from equity shares, which are associated with market volatility and the concerned company's profits, you can earn stable and competitive interest income from fixed deposits. Stable Money-partnered banks and NBFCs offer high interest rates of up to 9.10% for seasoned and conservative depositors.

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