Subject: Note on Tax deduction at source (“TDS”) regulations for dividend pay-out

1. 1. There is a change in the dividend tax regulations starting 1st April 2020. Earlier requirement of payment of Dividend Distribution Tax (DDT), by the issuer companies, has been abolished and the issuer companies are now required to withheld TDS (For individuals, if the dividend amount is in excess of Rs 5,000) and make the balance / net payment to the shareholders after deducting TDS. 
   (refer changes in Section10(34) & 10 (35), 115A for non-residents, 115AC& 115ACA for GDRs, 115AD for FIIs, 115BBDA dividend taxability > Rs 10 Lakh for specified assessee, 115-O, 115R to abolish DDT,194, 194K, 195, 196A (mutual fund units by NRs), 196C (GDRs) and 196D (FIIs) of the Income Tax Act, 1961)
   Definition of FIIs as per Section 115AD
   CBDT Notification No. 9/2014/ F. No. 173/10/2014-(ITA.I) dated 22nd January, 2014
   CBDT Notification No. 17/2020/ F. No. 173/10/2014-ITA-I dated 13th March, 2020

1. 2. Shareholders would be taxed for the receipt of dividend as per their own income slab / rate subject to other applicable provisions of the Income TaxAct. This change has created significant additional responsibility on the issuer companies.

1. 3. Shareholders to be classified into several categories for the purpose of ascertaining applicable TDS rate as below:
   3.1 Residents
   1. 3.1.1 Having PAN and not provided Form 15G / 15H
   2. 3.1.2 Having PAN and provided Form 15G / 15H for non-deduction of TDS
   3. 3.1.3 Not having PAN – with or without Form 60 (mostly for the physical shareholdings)
   4. 3.1.4 Insurance Cos / Government/RBI / Mutual Funds/Cat – I&IIAIFs/ Regulatory organizations etc. which are tax/TDS exempt
   (refer Note 1)
   5. 3.1.5 Individuals where total dividend pay-out in a financial year does not exceed Rs 5,000 (including previous pay-outs in the same financial year, if any)
   3.2 Non-Residents
   1. 3.2.1 Non-residents having Indian PAN
   2. 3.2.2 Non-residents not having Indian PAN- alternate documents are required to be obtained (under Rule 37BC of the Income Tax Rules)
   3. 3.2.3 Whether non-resident is able to provide following documents – to make an assessment if any preferential with-holding tax may be applied as per Double Taxation Avoidance Agreement (DTAA) and evaluation of Multilateral Instrument (“MLI”) impact:
   1. 3.2.3.1 Tax Residency Certificate (TRC) from their income tax assessing officer of their home country
   2. 3.2.3.2 Duly executed Form 10F
   3. 3.2.3.3 An undertaking that they do not have Permanent Establishment (PE) in India
   4. 3.2.3.4 An undertaking that they are beneficial owner of the shares and related matters (to avoid General anti-avoidance rule (GAAR) liability)
   4. 3.2.4 Global Depository Receipts (GDR) holders
   5. 3.2.5 Foreign Institutional Investors (FIIs) / Foreign Portfolio Investors (FPIs)
   6. 3.2.6 Mutual fundunit holders (applicable in case of mutual funds)
2. 3.3 Shareholders who have obtained and furnished lower or nil rate TDS certificate which they might have obtained from their assessing officer (by making an application in Form No 13 as per Section 197 of the Income Tax Act)
3. 3.4 NRIs, PIOs, U.N. entities, multilateral agencies, residents of Sikkim etc. - exempted from PAN as per SEBI circular no: MRD/DoP/Dep/Cir-09/06 dated July 20, 2006 and circular no: MRD/DoP/Dep/SE/Cir-13/06 dated September 26, 2006

1. 4. TDS rate would be decided based on the classifications mentioned above. Please refer the applicable TDS rate in the table attached herewith

1. 5. Shares held in pool account of Clearing Corporation / Custodians as on the “record date” - Since the beneficial/end shareholder status is not known, the TDS will be deducted assuming shareholders are Clearing Corporation / Custodian with their PAN, as their name is appearing in the “Register of Member” as on the “record date”

1. 6. Shares held in MCA IEPF / Escrow for IPO / Suspense Account under regulation 39 of SEBI LODR as on the “record date” – Need to identify details of the underlying shareholders, determine the TDS rate basis the status and category of the underlying shareholders

1. 7. Issue of Form 15CA / 15CB for foreign remittance of dividend (a part of the form needs to be certified, online, by a practicing chartered accountant)

1. 8. Creating funding file for net dividend payable to each shareholder and TDS payment

1. 9. Finalization and submission of TDS return

1. 10. Issuance of Form 16A to all the shareholders

#	Shareholder Category	Applicable Section	TDS Rate
(A) Residents:
1	Resident with PAN	194	7.5% (refer press release)
2	Resident individuals where total cumulative dividend pay-outs in a financial year not exceeding Rs 5,000	194	Nil
3	Resident who provided 15G/15H form	Not applicable	Nil
4	Residents without PAN	206AA	20% + SC + Cess
5	Insurance Cos / Government / RBI / Mutual Funds / Cat – I&II AIFs / Regulatory organizations etc.	Refer Note - 1	Nil
6	Payment of dividend by mutual funds to its unit holders	194K (CBDT Clarification)	7.5% (refer press release)
(B) Non-Residents:
6	Non-resident with Indian PAN or docs as per Rule 37BC – not able to provide TRC, Form 10F, No PE, undertakings, Orwhere there is no dividend tax rate provided in DTAA	195 & 115A	20% + SC + Cess
7	Non-resident with Indian PAN or docs as per Rule 37BC – provided TRC, Form 10F, No PE, undertakings	195, 90, DTAA & evaluation of MLI impact	As per DTAA (refer country-wise rate card)
8	Non-resident without Indian PAN or not provided docs as per Rule 37BC but provided TRC, Form 10F, No PE, undertakings	195 & 206AA or 90, DTAA & evaluation of MLI impact	As per DTAA (prone to litigation) Otherwise, 20% + SC + Cess)
9	Payment of dividend by Mutual Funds to non-residents holding units of mutual funds	196A or 90, DTAA & evaluation of MLI impact	20% + SC + Cess Or DTAA rate if provided TRC, Form 10F, No PE, undertakings (Note – 4)
10	Payment of dividend to GDR holders (purchased in foreign currency)	115AC, 196C or 90, DTAA & evaluation of MLI impact	10% + SC + Cess Or DTAA rate if provided TRC, Form 10F, No PE, undertakings (Note – 4)
11	Payment of dividend to FIIs / FPIs	115AD, 196D or 90, DTAA & evaluation of MLI impact	20% + SC + Cess Or DTAA rate if provided TRC, Form 10F, No PE, undertakings (Note – 4)
(C)	Shareholders who have obtained and furnished lower or nil rate TDS certificate	As per AO Certificate

Note 1: Following types of resident entities are exempted from TDS on dividend pay-out

1. Insurance companies provided shares are owned by it or in which it has full beneficial interest – as per second proviso to Section 194
2. Government, RBI, a corporation established under a Central Act which is, under any law for the time being in force, exempt from income-tax on its income, Mutual Funds registered with SEBI – as per Section 196
3. Category I or a Category II Alternative Investment Fund registered & regulated by SEBI (as defined under Section 115UB and exempted from income under Section 10(23FBA). Refer CBDT notification no: 51/2015 dated 25th June 2015
4. List of entities whose income is unconditionally exempt and not required to file income tax return as mentioned under CBDT circular no: 18/2017 dated 29th May 2017
5. Resident individuals where total cumulative dividend for a financial year is not exceeding Rs 5,000 - as per first proviso to Section 194

Note 2: Surcharge is dependent on type and net income level of the payee as per table provided in Note -3 below. Health & Education Cess is 4% on applicable tax plus surcharge.

Note 3: Applicable Surcharge table for the financial year 2020-21:

#	Type of Assessee	Total Income Range**	Surcharge
(A) Resident:
1.	Individuals / HUF / AOP / BOI / Artificial juridical person	0 to Rs 50 lakh >Rs 50 lakh up to Rs 1 Crore >Rs 1 crore up to Rs 2 crore >Rs 2 crore up to Rs 5 crore >Rs 5 crore	Nil 10% 15% 25%* 37%*
		* for dividend, surcharge is restricted to 15% only
2.	Firm / Co-operative society / local authority	0 to Rs 1 crore >Rs 1 crore	Nil 12%
3.	Domestic Company	0 to Rs 1 crore >Rs 1 crore up to Rs 10 crore >Rs 10 crore	Nil 7% 12%
(B) Non-residents
1.	Individuals / HUF / AOP / BOI / Artificial juridical person	0 to Rs 50 lakh >Rs 50 lakh up to Rs 1 Crore >Rs 1 crore up to Rs 2 crore >Rs 2 crore up to Rs 5 crore >Rs 5 crore	Nil 10% 15% 25%* 37%*
		* for dividend, surcharge is restricted to 15% only. However, normal surcharge applicable (i.e. 25% and 37%) in case non-resident shareholder is FII/FPI, GDR holder or for holder of units of mutual funds and TDS is applicable under Section 196A, 196C or 196D
2.	Firm / Co-operative society / local authority	0 to Rs 1 crore >Rs 1 crore	Nil 12%
3.	Foreign Company	0 to Rs 1 crore >Rs 1 crore up to Rs 10 crore >Rs 10 crore	Nil 2% 5%

**For the purpose of TDS-Surcharge, Total Income of the payee to be ascertained based on the total income amount being paid to the payee by the issuer company in a financial year i.e. current payment plus all previous payment(s) in the same financial year unless payee provides a written declaration for a higher total income amount.

Note 4: As peropinion from a few experts, the benefit of lower rate of dividend tax under DTAA may not be available to unit holders of mutual fund, GDR and to FIIs / FPIs as there is a specific with-holding tax rate available for them, under the Income Tax Act and it (these with-holding charging sections i.e. 196A, 196C and 196D) are not covered by the definition of “rate or rates in force” under Section 2(37A)(iii).

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