Section 10(34) - Income Tax Exemption on Dividend
Income
5-6 minutes
Tired of paying taxes? Not always you need to pay tax on your income. Some incomes are still tax-free. Let’s
take a ride on how your dividend income is exempt from tax if received from a domestic company. Section
10(34) allows tax exemption on the dividend income as it is taxed while declaration or distribution by the
domestic company as Dividend Distribution Tax.
What is Tax Exemption under Section 10(34) of the Income Tax Act?
According to section 10(34) of the Income Tax Act, 1961, dividend received from a domestic company is
exempt in the hands of the shareholders provided such dividend has already suffered Dividend Distribution Tax
(DDT) under section 115-O. However, for a domestic company or a trust or institution registered under section
12A or section 12AA, the dividend is chargeable to tax under section 115BBDA at the rate of 10% if the
aggregate amount of dividend received from a domestic company exceeds ₹ 10 lakhs.
Dividend income received from a foreign company is however added to the total income of the assessee under
the head “Income from Other Sources” and chargeable to tax at the respective slab rate applicable to the
assessee. However, in case of an assessee being a domestic Company, foreign dividend is chargeable to tax at a
concessional rate of flat 15% (plus applicable surcharge and cess) under section 115BBD provided the domestic
or Indian company holds more than 26% of the nominal equity capital of the said foreign company. It should be
noted that the flat rate shall be applied on the gross value of the dividend received and no deduction of
expenditure in respect to such dividend shall be allowed.
What is a Dividend?
In general sense, a dividend is referred to as the distribution of the current or accumulated profits to the
shareholders of a company. The dividend also includes deemed dividend as defined under section 2(22)(e) of
the Income Tax Act, 1961. As per section 2(22)(a) to section 2(22)(d) divided includes:
a) Distribution of income followed by the sale of all or any part of the asset of the company.
b) Distribution in the form of debentures, debenture stock, or deposit certificates, which may be with or
without interest, and any distribution in the form of bonus to its preference or equity shareholders.
c) Distribution made out of the surplus at the time of liquidation except in the cases where the
shareholders are not entitled to such surplus.
d) Distribution on the reduction of capital of the company.
e) Payments in the form of loans or advances made by a closely-held company (where the public is not
substantially interested) to its members or partners having shareholding or voting rights of not less than
10% and advance is made for the individual benefit. However, such advance would not be considered as
a dividend if it is made in the ordinary course of business or money lending is the part of the business.
A dividend does not include:
Payment by the company to purchase its own shares (buy-back).
Distribution by the resulting company in case of demerger.
Dividend paid by the company to set off against whole or part of the sum which was previously paid and
taxed under section 2(22)(e) considering it to be deemed dividend.
Why is the Dividend Income Exempt?
In India, we always have earned less and paid more. And that is how we had always find ways to escape from
the same. This section was introduced in order to charge the tax on dividend income which usually was not
declared while filing returns. In order to ensure proper tax collection on the dividend, section 115-O came into
force. Also, dividend income from a domestic company is exempt in the hands of the shareholders for a simple
reason of avoiding double taxation. The domestic company is liable to Dividend Distribution Tax (DDT) at the
time of either declaration, distribution or payment of dividend, whichever is earlier under section 115-O which
makes it exempt for the recipients.
For example, a domestic company having 10 shares is planning to pay a dividend of ₹ 200 and the applicable
rate of DDT is say 15%. The company after paying the tax @ 15%, i.e. ₹ 30 will be now able to pay the
dividend of ₹ 170 only. The shareholders are paid ₹ 1.7 per share as dividend after being taxed instead of ₹ 2
per share. Hence, they are exempt from tax.
Just like dividend income, there are several other types of income which are exempt from tax under section 10
of the Income Tax Act. The tax experts at H&R Block India can help you file your tax return accurately so that
you can optimise your tax savings legally.
