Income Tax Taxation

Advance tax computation if dividend income is earned during the year

Advance tax computation if dividend income is earned during the year

The Finance Act, 2020 abolished the Dividend distribution tax and adopted the conservative system of taxation wherein the dividend declared, distributed, or paid on or since 1st of April 2020 would be taxable in the hands of shareholders. When the dividend was made taxable, different consequential amendments were made to the Income Tax Act. In this article, we shall discuss the amendment proposed by the Finance Bill 2021, under section 234 C. But before that, let’s discuss some related concepts like advance tax computation.

Meaning of Advance Tax

Advance tax is a scheme where an assessee should estimate his income and the tax liability thereon. The tax estimated should be paid in instalments during the financial year itself. Therefore an assessee should pay tax as he earns.

Applicability to pay advance tax

Let’s now know who is liable to pay this tax.

It may be noted that every assessee is liable for the payment of advance tax where his estimated tax liability of the financial year is either 10000 rupees or more. Therefore every assessee, regardless of his or her residential status, would be liable to pay advance tax if the tax payable is 10000 rupees or more during the financial year.

However, a resident individual, whose age is 60 or more years at any time during the previous year, is not required to pay the advance tax unless he or she has any income from business or profession.

Advance Tax Computation

In order to compute the tax payable through advance tax (meaning advance tax computation), the assessee should compute the estimated income for the financial year and the tax liability thereon. At the time of estimating the total income, he can claim all deductions and exemptions to which such person is entitled.

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Moreover, the tax computed on income so estimated would be reduced through the amount of tax deductible or collectible by way of Tax deducted at source/Tax collected at source.

Due date for payment of advance tax

The advance tax should be paid by the assessee in 4 instalments on or before the specified due dates as mentioned in the table made below.

DUE DATE FOR PAYMENT OF ADVANCE TAXADVANCE TAX TO BE PAID
On or before 15th day of June of previous yearNot less than 15 percent of the advance tax
On or before 15th day of September of previous yearNot less than 45 percent of the advance tax
On or before 15th day of December of previous yearNot less than 75 percent of the advance tax
On or before 15th day of March of previous year100% of the advance tax

It may be noted here that an assessee who declares his or her business or professional income as per presumptive tax scheme of section 44 AD or section 44 ADA shall not be liable to discharge his advance tax liability as per aforesaid instalments. Such person is required to discharge the whole amount of his advance tax liability on or before 15th March of the previous year. Hence he can pay 100% of advance tax in one instalment on or before 15th March of the previous year.

Amendment proposed by the Finance Bill under Section 234 C

Until the assessment year 2020-21, the relaxation from charging of interest under Section 234 C with regards to dividend income as available only when such income was chargeable to tax. However, since the abolition of the Dividend distribution tax, section 115BBDA shall be not relevant as the entire amount of dividend would now be taxable in the hands of the shareholder. Hence, the finance bill 2021[1] has proposed to substitute the reference of section 115BBDA from clause (d) of the first proviso to section 234 C (1) with the amount of dividend income.

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No interest under section 234 C will be levied in case the deficit in the payment of advance tax is attributable to the dividend income, obtained from the Indian Company or a foreign Company. The assessee would be liable to pay the advance tax on the dividend income only when it’s accrued or received.

Additionally, a new explanation 2 is proposed to be inserted with a view to provide the meaning of dividend for the purpose of section 234 C(1). It has proposed that Dividend shall have the meaning assigned to it in section 2(22), but it shall not include sub-clause (e) thereof.

Impact of the proposed amendment

According to section 8 of the Income Tax Act and ICDS-IV, any dividend declared by company or distributed or paid by it within the meaning of clause- (a) to (e) of Section 2(22) would be deemed to be the income of the previous year wherein it is so declared, distributed or paid as per the case may be.

Any interim dividend would be deemed to be the income of the previous year wherein the amount of the dividend is unconditionally made available from the company to the member who’s entitled to it.

Conclusion

Hence, the final dividend declared at the AGM is deemed to be the income of the previous year wherein it’s declared. The receipt date is immaterial, whereas the interim dividend is chargeable to tax on the basis of the receipt. Contact a tax professional for more info on advance tax computation and related concepts.

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