Post-DDT tax position from 1 April 2020
Dividend Distribution Tax (DDT) was abolished w.e.f. 1 April 2020. Since then:
- Companies don’t pay DDT.
- Dividend is taxable in the hands of the shareholder at applicable slab rates.
- The company withholds TDS at 10% (Section 194) on dividend exceeding ₹5,000 to a resident.
- For non-resident shareholders, Section 195 applies at 20% (or DTAA rate if lower).
The corporate side mechanics — declaration, distribution, withholding, FEMA repatriation — need careful drafting.
Companies Act, Income-tax Act & FEMA references
The relevant references:
- Section 123 of the Companies Act 2013 — declaration and payment of dividend.
- Section 124 — unpaid dividend account; transfer to IEPF after 7 years.
- Section 125 — Investor Education and Protection Fund.
- Section 194 of Income-tax Act — TDS at 10% on dividend to residents.
- Section 195 — TDS on dividend to non-residents.
- Section 94(7) and 94(8) — dividend stripping prevention.
- FEMA NDI Rules — repatriation of dividend to foreign shareholders.
From profit-sufficiency to FEMA repatriation
- Profit-sufficiency check — out of current year’s profits or accumulated profits per Schedule III.
- Sources — reserves and surplus, free reserves, securities premium (with restrictions).
- Board recommendation — rate of dividend, record date.
- Shareholder approval at AGM (final dividend) or at board meeting (interim dividend).
- Dividend bank account — separate scheduled-bank account for the dividend (per Section 123(4)).
- TDS deduction — 10% to residents (Section 194); higher for non-residents (Section 195).
- Dividend payment — within 30 days of declaration.
- Unpaid dividend — transfer to Unpaid Dividend Account within 7 days after the 30-day period.
- Filing — MGT-7 disclosure, MCA-filings of the dividend.
- FEMA filing — for foreign shareholders, AD bank coordination on repatriation.
Dividend out of reserves, foreign shareholders, buyback alternative
- Dividend out of reserves — permitted only if rate doesn’t exceed average rate of 3 preceding years; profit transferred to reserve at least equal to dividend amount; balance transferred not less than 10% of paid-up capital.
- Dividend to non-residents — TDS at 20% (or treaty rate); FEMA repatriation through AD bank under NDI Rules.
- Interim dividend — out of profits of current FY; restrictive conditions if FY is loss-making.
- Dividend stripping — Section 94(7) prevents loss-claim if shares acquired/sold within prescribed window.
- Buyback as alternative — tax-efficient for promoters in some scenarios; 20% buy-back tax under Section 115QA.
How we run a dividend cycle
- Profit-availability assessment — including any restrictions on free reserves.
- TDS planning — resident vs non-resident shareholder mix, treaty applicability, lower-deduction certificates.
- Board / shareholder resolutions drafting.
- Banking setup — separate dividend account.
- Payment and TDS deposit.
- Quarterly TDS return (24Q / 26Q / 27Q).
- Companies Act filings — MGT-7 disclosure, dividend particulars.
- FEMA & AD bank coordination for foreign-shareholder repatriation.
- Unpaid dividend tracking and IEPF transfer at year 7.
How long & how we charge
End-to-end dividend cycle: 4–6 weeks from board recommendation to payment + filing. Fixed-fee per dividend cycle, scaled by shareholder count and resident / non-resident mix.
Common questions on dividend payment
Can dividend be paid in cash?
No. Section 123(5) requires payment by cheque or warrant or electronic mode. Cash payment is prohibited.
What happens if the dividend isn’t claimed by a shareholder?
Goes to Unpaid Dividend Account. After 7 years, transferred (along with the underlying shares) to IEPF. Shareholder can later claim from IEPF.
Is buyback better than dividend for closely-held companies?
Often yes, in pre-2024 framework. Post Finance Act 2024, buyback proceeds are taxable in the hands of the shareholder — the comparative advantage is reduced. We model both routes before recommending.
Can interim dividend be paid in a loss year?
Only out of free reserves; the average-rate rule applies. Practically, most companies skip interim dividend in loss years.
Talk to a partner.
A 30-minute call with a partner — no deck, no follow-up email blasts. Just a read on whether we’re the right team to handle your dividend declaration & payment.