Shareholder or Beneficial Owner Under Dividend Income Tax in India

When it comes to taxation of dividend income in India, it is important to understand the distinction between a shareholder and a beneficial owner. The Income Tax Act, 1961, has specific provisions relating to the taxation of dividend income and it is crucial for taxpayers to be aware of the rights and responsibilities associated with being a shareholder or a beneficial owner. In this article, we will delve into the legal aspects of being a shareholder or beneficial owner under dividend income tax in India.

Shareholder Under Dividend Income Tax

A shareholder, in the context of dividend income tax, refers to a person who owns shares in a company and is entitled to receive dividends from such company. The Companies Act, 2013, governs the rights and obligations of shareholders in Indian companies. From a taxation perspective, a shareholder is liable to pay tax on any dividend income received from the company in which they hold shares.

Under the Income Tax Act, 1961, dividend income is taxed in the hands of the recipient shareholder. The Finance Act, 2020 introduced a new tax regime for dividends, wherein dividends are now taxed at the hands of the recipient shareholders at their applicable tax rates. Previously, companies were required to pay a dividend distribution tax (DDT) on the dividends declared, which was not the case for the recipient shareholders.

As a shareholder, it is important to understand the tax implications of receiving dividend income. Dividend income is classified as "income from other sources" under the Income Tax Act and is taxed at the applicable slab rates. Additionally, shareholders are required to report dividend income in their income tax returns and pay taxes accordingly.

Beneficial Owner Under Dividend Income Tax

The concept of beneficial ownership is crucial in the context of dividend income tax in India. A beneficial owner refers to a person who enjoys the benefits of ownership of a security, such as shares, even though the security is registered in the name of another entity, such as a nominee or a custodian. The concept of beneficial ownership is relevant in cases where shares are held through depository participants or other intermediaries.

The Securities and Exchange Board of India (SEBI) has laid down regulations pertaining to beneficial ownership of securities in India. From a tax perspective, the distinction between a registered owner and a beneficial owner is important, especially in cases where the dividend income is received by the beneficial owner and not the registered owner.

In 2019, the Central Board of Direct Taxes (CBDT) issued a circular clarifying the tax treatment of dividend income in the hands of beneficial owners. The circular stated that in cases where the beneficial owner of shares is different from the registered owner, the beneficial owner is entitled to claim the beneficial provisions of the tax treaty between India and the country of residence of the beneficial owner. This circular provided much-needed clarity on the taxation of dividend income for beneficial owners.

The taxation of dividend income in India is governed by various provisions of the Income Tax Act, 1961. Section 2(22) of the Act defines the term "dividend" and includes various forms of payments, such as distribution of accumulated profits, distribution of debentures, and distribution of assets on liquidation. It is important for taxpayers to carefully analyze the nature of the payment to determine its tax treatment under the Act.

Additionally, Section 115-O of the Income Tax Act, 1961, deals with the tax on distributed profits. This section mandates that companies are required to pay a dividend distribution tax (DDT) on the dividends declared, distributed, or paid. However, with the introduction of the new tax regime for dividends, as mentioned earlier, the DDT has been abolished, and dividends are now taxable in the hands of the recipient shareholders.

In the case of beneficial owners, the tax treatment of dividend income is determined by provisions of the Act, as well as circulars and notifications issued by the CBDT. It is important for beneficial owners to stay updated with the latest developments in tax laws to ensure compliance with the applicable provisions.

Tax Planning Considerations for Shareholders and Beneficial Owners

For both shareholders and beneficial owners, tax planning plays a crucial role in optimizing tax liability on dividend income. Shareholders may explore various tax-saving options, such as availing the benefit of tax deductions and exemptions available under the Act. Additionally, shareholders should consider the impact of dividend income on their overall tax liability and plan their investments accordingly.

Beneficial owners, on the other hand, should carefully structure their investments to ensure tax efficiency. This involves understanding the tax implications of holding securities through intermediaries and making informed decisions regarding the claiming of treaty benefits, if applicable. Furthermore, beneficial owners should maintain adequate documentation to substantiate their beneficial ownership claims in the event of a tax scrutiny.

Conclusion

In conclusion, the taxation of dividend income in India presents unique challenges for both shareholders and beneficial owners. It is imperative for taxpayers to have a clear understanding of the legal provisions governing dividend income tax and to remain abreast of any developments in the tax landscape. By being aware of their rights and responsibilities as shareholders or beneficial owners, taxpayers can effectively plan and manage their tax liabilities on dividend income. It is advisable for taxpayers to seek professional tax advice to ensure compliance with the applicable laws and to optimize their tax positions effectively.