Readers would be aware that Yashwant Sinha in his capacity as finance minister had, in 2003, brought about a sea change in the taxation of dividend income. In the Budget of 2003, he had done away with taxation of dividend in the hands of the shareholders or unitholders and instead transferred the onus of payment of tax to the companies and mutual funds. Over the years, there were several changes in this scheme of taxation. But the fundamental principle remained constant i.e., recipient of dividend was not required to pay tax on it but the company or mutual fund declaring the dividend was required to pay a dividend distribution tax (DDT).
This law was applicable from FY03-04 (assessment year 04-05) to FY19-20 (assessment year 20-21). In the Budget of 2020, the current finance minister has restored the old position that was in existence before FY03-04. Thus, now, with effect from FY20-21, dividend income would once again be taxable in the hands of the recipients and no DDT would be payable by the company or mutual fund.
It may be noted that in the past when dividend was taxable in the hands of the recipients, we had Section 80L under which a deduction was available to the shareholder of up to Rs12,000 per year for the dividend income. Unfortunately, now, even though dividend has been made taxable, section 80L or its equivalent have not been brought onto the statute. So, effectively, the entire dividend income would be taxable now without any deduction of the type that was available prior to 1 April 2003.
The taxation of dividend in the hands of the shareholders and unitholders has given rise to another compliance burden for some taxpayers and, of course, for the companies and mutual funds—that of tax deducted at source (TDS).
TDS or tax deduction at source is mandatory for most types of payments. Dividend will also attract TDS. There is an existing section in the Income-tax Act—Section 194, which applies to TDS from dividend on shares. As per this section, the company which declares dividend is required to deduct TDS from the dividend @ 10%.
Apart from the actual tax, the company would also need to deduct surcharge wherever applicable. In the same way, a newSection—194K—has been introduced into the Income-tax Act under which mutual funds have to deduct TDS @ 10%.
While this 10% is the standard rate of deduction, with a view to alleviate the hardship caused by COVID-19, the government has, across the board, reduced the TDS rates by 25% of the normal rates. Therefore, the actual rate of TDS for FY20-21 will be 7.50% instead of 10%. Of course, if you don’t have a PAN then the rate would be 20%.
For individuals, there is one concession – the TDS is to be deducted only if the total dividend expected to be distributed or paid to a shareholder by that particular company or mutual fund is likely to exceed Rs5,000 in the year (April to March). Thus, for example, if a person has shares of, say, Tata Chemicals and if the total dividend that is likely to be paid by Tata Chemicals to that shareholder in the whole year is not expected to be more than Rs5,000, then Tata Chemicals need not deduct any TDS for that shareholder.
Now, as far as senior citizens or retired persons are concerned, it is possible that the total income even after including dividend income will not exceed the threshold limit. In such cases, if the company that is paying the dividend deducts TDS then it would unnecessarily block the much required funds of that person and he or she would need to claim a refund from the income-tax department.
To avoid such a problem, the Income-tax Act provides a facility to such taxpayers to avoid TDS by submitting Form 15G or Form 15H to the company or mutual fund in advance (at the beginning of the year) and thereby authorize the said company or mutual fund to not deduct TDS in that year.
Form 15H is applicable to senior citizens (which term is defined to mean any person who is more than 60 years of age) with no taxable income. This form can be submitted by any senior citizen who expects his tax liability for that year to be NIL. Thus, what the senior citizen has to do at the beginning of the year is to estimate the gross income for the year, reduce the deductions, if any, compute the tax liability and reduce the rebate if any, and then, if there is nothing payable, he/she can fill up Form 15H and submit to the company or mutual fund from whom income is expected during the year.
On the other hand, Form 15G can be filed by a non-senior citizen who expects his tax liability for that year to be NIL.
Now, the problem that most people will face this year (and every year thereafter) is that they will have to file Form 15G/15H with every single company or mutual fund where they hold shares or units if they don’t want a TDS from the dividend income.
This is a major compliance burden on the share or unitholders especially in those cases where there a large number of companies or mutual funds in which the taxpayer holds investments. Most people would have, by now, got emails from many companies and mutual funds asking them to fill up Form 15G/15H. Most such mails would have asked the share or unit holder to submit the form to the registrar & transfer agent (RTA) of the company or mutual fund.
Would it not be simple if a shareholder or unit-holder could submit just one common form to the RTA or some other agency and thereby get the exemption from TDS from dividend from all companies or mutual funds in which he/she holds investments?
Yes, it would.
But unfortunately, that is not possible. This is because the liability to deduct TDS is on each company or mutual fund. Also, the way the Income-tax Act and rules are drafted, it is mandatory for each company or mutual fund to obtain a separate Form 15G or 15H from the concerned share or unit-holder.
Each such company or mutual fund has multiple responsibilities with respect to the forms so received by it from the share or unit-holders. So, now, those who wish to avoid TDS from their dividend income will have to go through the rigmarole of submitting the Form 15G/15H to each company or mutual fund from which dividend income in excess of Rs5,000 is expected during the year.
(Ameet Patel is a practising chartered accountant who qualified in 1986 and as a rank holder at the Inter and Final CA examinations. He is the ex-president of the Bombay Chartered Accountants' Society (BCAS), a voluntary body of Chartered Accountants. Mr Patel has co-authored two publications published by the BCAS. Currently, he is a partner at Manohar Chowdhry & Associates.