Sec 115 O of Income Tax Act (Guide 2023)

A lot of assumptions came through as soon as the amendment to the Income Tax Act happened in 2020. As per the new law, the tax imposed on the dividend will be paid by the shareholders and not the company. However, this change applies to the dividends received after the assessment year 2020-2021, under section 10 (34) of the Act. Now, let’s discuss Sec 115 O of Income Tax Act to understand more about taxation on the dividends received.

Sec 115-O of Income Tax Act Amendment

In simple words, the dividends/profits received ON OR AFTER the 1st day of April 2020 will be taxed in hands of the receiver at the rate of 15%.

Before this amendment, the receiver was not liable to pay any taxes. The company was liable to pay the dividend tax and corporate tax for the total dividend gained. This amendment removes the burden of paying taxes on dividend income from the companies to the shareholders.

But, the tax imposed on all the dividends distributed till 2020-2021 is subject to be paid by the domestic company as Dividend Distribution Tax or DDT under section 115 O of the Income Tax Act.

Tax rates on Dividend Received:

The domestic company is liable to pay a dividend tax of 15% before distributing it to the shareholders. 

Therefore the dividend income received by the shareholder/individual is tax-free, as it is received after deducting the tax.

The tax on the dividend must be paid within 14 days of their declaration or distribution, whichever is earlier. If failed to do so, 1% of additional tax is charged additionally on the dividend until the day they paid.

Few special provisions of Dividend Tax are as follows:

The dividend income is taxable @ 10% if the dividend income received is more than Rs 10 Lakh by any individual, Partnership firm, and private trust. 

If both the holding company and the subsidiary company have declared dividends, then the dividend tax will be charged with respect to the following points:

1. The dividend income is declared or paid or distributed.
2. Less: the dividend received from the subsidiary company.

Is 115 O Still Applicable?

No, 115 O is not applicable if you have received any dividend after 31st March 2020 from a domestic company.

Benefit of Sec 115-O of the Income Tax Act

The abolition of the dividend distribution tax will benefit different income groups of investors. The investors will be taxed as per their annual income range under the income tax act, which means that the lower income group will be taxed less for the same amount of dividend received from a domestic company.

The lower-income group and middle-income group will benefit the most from section 115 O. 

This will also increase the investment in shares and create an inflow.

The DDT will be deducted prior to distribution to the shareholders. This means that now the companies will be less burdened and just have to pay the corporate tax.

However, there are some provisions for the dividends received from a foreign company. It is discussed later in this blog.

Dividend Distribution Tax Rate for ay 2022-23

The DDT rate for the annual year 2022-2023 are as follow:

1. A dividend received from a domestic company is liable to 15% DDT to be paid by the company. 

The dividend is applicable on the gross amount of the dividend under section 115 O

2. The dividend income received by an individual/HUF/Partnership firm/private trust is more than 1 lakh, and a DDT of an additional 10% is levied to be paid by the receiver.

3. For mutual funds, a DDT of 10% is charged for equity funds and 25% is charged for debt-oriented funds.

Withdrawal of the 15% concessional rate of taxation on dividends under section 115BBD

If a domestic company received a dividend income from a foreign company and the domestic company has more than 25% of equity shares of the foreign company, then a tax of 15% is imposed on the dividend received.

This provision will not be applicable to any dividends received or declared after or on 1st April 2023. 

A sub-section 4 is added in the Section 115BBD of the income tax act stating the same;

“(4) The provisions of this section shall not apply to any assessment year beginning on or after the 1st day of April 2023.”

Let’s take a look at the rates of surcharge, marginal relief, and Health and Education cess.

Surcharge: It is an extra tax imposed on a person earning income above a certain range. The surcharged rates for different income ranges are as followed:

• A surcharge of 7% is taxed if the income is between 1 crore to 10 crore.
• A surcharge of 12% is taxed if the income is more than 10 crore.
• A surcharge of 10% is taxed under section 115 BAA or section 115 BAB if the company opts for taxability.

Marginal Relief: If the surcharge is more than the additional income that makes the person liable for the surcharge, then the relief from the surcharge is known as marginal relief. 

Marginal relief is given when the amount payable as surcharge is more than the earned income and the earned income should not be more than 1 and 10 crores respectively.

Health and Education cess: The Health and Education Cess is charged at the rate of 4% over the income tax and applicable surcharge.

Conclusion

Sec 115 O of Income Tax Act refers to the abrogation of the DDT. The DDT will be paid by the investors and shareholders if the dividend is declared or distributed after 31st March of 2020. The dividend received will be taxed at 15% by the domestic company. For an individual, if the dividend income is more than 1 Lakh, an additional tax of 10% will be charged on the gross dividend income.

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