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The Income Tax Act, 1961 (Act), as amended by the Finance Act 2020, mandates that dividends paid or distributed by Indian Companies on or after April 1, 2020 would be taxable in the hands of shareholders. As per the new provisions, Indian company is required to deduct the applicable tax at source under various sections of the Income Tax Act, 1961 (Act). 

Dividend payment to resident shareholders is subject to a withholding tax of 10% provided the shareholder has updated his PAN with the depository or the Company as the case may be. Otherwise, the TDS rate would be 20%. However, there is no withholding tax, if the dividend paid to a resident individual shareholder does not exceed Rs. 5,000 in the fiscal year.

Dividend payment to non-resident shareholder {including Foreign Institutional Investors (FIIs)/ Foreign Portfolio Investors (FPIs)} is liable for withholding tax at a rate of 20% (plus applicable surcharge and cess). A lower rate for withholding may apply if the benefit of tax treaty is available to the shareholders.

Section 206AB of the Act

The newly introduced provisions section 206AB of the Income Tax Act, 1961 is applicable with effect from 1 July 2021, which provides for higher deduction of tax at source for non-filers of income-tax return, whereby tax has to be deducted at the higher of the following rates, namely-

(i)  at twice the rate specified in the relevant provision of the Act; or

(ii)  at twice the rate or rates in force; or

(iii)  at the rate of five per cent.

Where sections 206AA and 206AB are applicable simultaneously i.e. the specified person has not submitted the PAN as well as not filed returns; the tax shall be deducted at the higher of the two rates prescribed in these two sections. 
The term ‘specified person’ is defined in sub section (3) of section 206AB of the Act who satisfies the following conditions:

  • A person who has not filed the income tax return for two previous years immediately prior to the previous year in which tax is required to be deducted, for which the time limit of filing of return of income under section 139(1) of the Act has expired; and
  • The aggregate of TDS and TCS in his case is ₹50,000 or more in each of these two previous years.

The non-resident who does not have the permanent establishment in India is excluded from the scope of a specified person.

Please refer to the Investor FAQs section of this website for questions on tax deduction at source on dividend distributed to shareholders and also for downloading the forms related to exemption from deduction of tax. The company has compiled this FAQ exercising due care and diligence, for the convenience of the shareholders. However, shareholders are encouraged to seek appropriate professional advice as pertinent to their specific circumstances and act accordingly.

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