Dividends are a key way for companies to share profits with their shareholders. Under the Income Tax Act, 1961, these dividend distributions are subject to Tax Deducted at Source (TDS), making compliance essential for both companies and shareholders. Below is a comprehensive guide to understanding TDS on dividends and the compliance steps involved.
What is a Dividend?
A dividend is the distribution of a portion of a company’s earnings to its shareholders. It is declared during a board meeting, and shareholders registered on the record date are entitled to receive the dividend. Dividends can be paid in cash or additional shares and are subject to TDS as per applicable provisions.
Section 194 of the Income Tax Act
The government introduced the system of TDS to reduce the time taken to collect tax and make the process simpler. TDS is deducted by the payer on behalf of the payee and deposited with the government. It is required to be deducted by the payer when making payments such as rent, professional fees, salary, dividends, etc.
Dividend payments were previously exempt from TDS. However, the Finance Act 2020 made amendments to section 194 of the Income Tax Act, bringing dividends under the TDS umbrella. Here are the key aspects of this section:
What is Section 194?
As per section 194 of the Income Tax Act, the principal officer of an Indian company declaring and paying a dividend must deduct tax at source from the amount of dividend before paying it to any resident. The company must deduct tax at source on equity shares.
TDS Rate: TDS must be deducted at 10% if the receiving shareholder’s total dividend income for the year exceeds ₹5000. The tax deduction is required at the time of making payment or credit, whichever occurs earlier.
Higher Rate for Missing or Invalid PAN: TDS @ 20% must be deducted for shareholders who provide an invalid PAN, have an inoperative PAN, or do not provide a PAN number (PAN Not Available).
About the Deductor & Deductee in Section 194
- The TDS on equity shares is deducted by the company declaring and paying dividends to the shareholders.
- The deductor (i.e., the company) must deposit the TDS with the government and file it on the TDS Reconciliation Analysis and Correction Enabling System (TRACES).
- The TDS must be deducted from the dividend income of shareholders residing in India.
TDS on Dividend Payment to Non-Residents
Dividend payments made to non-resident shareholders are subject to TDS under Section 195 and Section 196D of the Income Tax Act. Here’s an overview of the provisions:
Section 195: TDS on Payments to Non-Residents
1.Scope: Applicable when dividend payments are made to non-resident individuals or entities other than Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors (FPIs).
2.TDS Rate: TDS is deducted at the rate prescribed under the Income Tax Act or the applicable Double Taxation Avoidance Agreement (DTAA), whichever is beneficial to the shareholder.
3.Documentation:
- Non-resident shareholders must provide valid Tax Residency Certificates (TRCs) and Form 10F to claim DTAA benefits.
- A lower TDS certificate under Section 197 may be obtained if applicable.
4.Filing Requirements: The company must file Form 15CA and Form 15CB (certified by a Chartered Accountant) before remitting the dividend to non-resident shareholders.
- Filing Requirements: The company must file Form 15CA and Form 15CB (certified by a Chartered Accountant) before remitting the dividend to non-resident shareholders.
Section 196D: TDS for FPIs and FIIs
- Scope: Specific to dividend payments made to Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors (FPIs).
- TDS Rate: A flat rate of 20% (plus applicable surcharge and cess) is deducted on dividend income, unless a lower rate is provided under a DTAA.
- No Requirement for PAN: Non-resident FIIs and FPIs may not require a PAN in India if DTAA benefits are availed.
- Compliance:
- Ensure accurate classification of shareholders as FPI/FII.
- Verify TRC and Form 10F to apply DTAA rates where applicable.
Key Dates in Dividend Declaration
- Board Meeting:
- The board of directors declares the dividend amount and type (interim or final).
- They finalize the record date to determine eligible shareholders.
- Record Date:
- The date on which shareholders’ eligibility for the dividend is determined.
- Payment Date:
- The date when the dividend is credited to shareholders’ accounts after deducting applicable TDS.
The Challenges of TDS Compliance on Dividends
Managing TDS on dividends comes with several challenges, including:
- Volume of Transactions: High numbers of shareholders increase complexity.
- Verification of Documents: Ensuring PAN, declarations under Form 15G/H, and DTAA benefits are accurately recorded.
- Non-Resident Compliance: Managing documentation and higher compliance requirements for non-resident shareholders.
- Data Reconciliation: Matching dividend registers with TDS filings and Form 26AS.
Steps for TDS Compliance on Dividends
1. Preparation of Exemption Data
- Collect and validate Form 15G/H declarations, DTAA claims, and exemptions for tax-exempt entities from shareholders.
- Ensure all documents are complete and valid.
2. Verification of PAN and Section 206AB Status
- Validate PANs against government databases.
- Identify shareholders subject to higher TDS rates due to non-compliance under Section 206AB.
3. Classification of Non-Residents
- Verify the residency status of shareholders.
- Confirm DTAA eligibility with proper documentation.
4. Rate and TDS Updation in Dividend Register
- Update applicable TDS rates in the dividend register based on declarations and exemptions.
- Apply higher rates for invalid or missing PANs.
5. Re-Verification of Dividend Register
- Conduct a final review of the dividend register to ensure all TDS details are accurate.
- Get approval from the Registrar and Transfer Agent (RTA).
6. Filing of Form 15CA/15CB for Non-Residents
- Prepare Form 15CA and obtain Form 15CB certified by a Chartered Accountant.
- File these forms for dividend payments to non-resident shareholders.
7. TDS Challan Preparation and Remittance
- Compute TDS liability and generate the challan.
- Remit the TDS amount within the prescribed timelines.
8. Filing Form 15G/H
- Submit the compiled Form 15G/H declarations to the Income Tax Department.
9. Filing of TDS Returns
- Prepare and file Form 26Q for residents and 27Q for non-residents.
- Ensure accuracy in the details submitted to avoid mismatches in Form 26AS.
10. Generation of Form 16A
- Generate TDS certificates from the TRACES portal.
- Digitally sign and distribute Form 16A to shareholders.
11. Filing of SFT-15
- File the Statement of Financial Transactions (SFT-15) for dividend payments as required under Section 285BA of the Income Tax Act.
Benefits of Streamlined Compliance
- Reduced Errors: Accurate and automated processes minimize compliance risks.
- Optimized Operations: Ensures timely remittance and filing, avoiding penalties.
- Enhanced Shareholder Relations: Transparency in TDS processes builds trust among shareholders.
- Regulatory Adherence: Smooth handling of tax audits and inspections.
Efficient handling of TDS on dividends is essential for maintaining compliance and fostering trust with stakeholders. By adopting a structured approach and leveraging technology-driven solutions, businesses can simplify the process, ensuring accuracy and transparency.