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How are dividends earned from US shares taxed in India?

The term dividend has been defined in Section 2(22) in an inclusive manner which includes the Distribution of accumulated profits to shareholders.

How are dividends earned from US shares taxed in India?
India has recognized the concept of Foreign Tax Credit in the Income Tax Act where it is specifically addressed under section 90 and section 91 of the Income Tax Act.

By Saurrav Sood

Dividends are the distribution of profits of the company to its shareholders. The term dividend has been defined in Section 2(22) in an inclusive manner which includes ‘Distribution of accumulated profits to shareholders’. The taxability of dividends has undergone changes over the past few years both from the perspective of an Indian company declaring dividends and an Indian company receiving dividends from a foreign company.

A. Taxability of dividends received from a foreign company can be covered under two different scenarios:

1. Dividend is received by an Indian company or an individual from shares of a foreign company – Where such dividend is taxable as income from other sources, the rate of tax applicable shall be the rate which is applicable to such Indian company. Further, in the case of an individual where the dividend income is taxable as income from other sources, the same shall be taxable as per the slab rates applicable to such an individual. From such tax calculated, where there is any incidence of withholding tax on such dividend received, the withholding tax can be availed as tax credit against the tax liability in India.

2. Dividend is received by an Indian company from shares of a specified foreign company – Where an Indian company holds 26% or more in nominal value of the equity share capital, then the foreign company becomes a foreign specified company and the dividend received by such foreign company was earlier taxable at a concessional rate of 15%1 on gross basis.

However, vide Finance Act, 2022, the provisions of Section 115BBD, which provides for such a concessional rate of tax, have been abolished and the beneficial rate of tax shall not apply. w.e.f. any assessment year beginning on or after the 1st day of April 2023.

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B. Deduction from dividend income

Deduction of expenses from dividend income is dependent on how such income is assessable to tax. Where the dividend is taxable as business income in the hands of the recipient, the assessee can claim the deduction of all those expenditures which have been incurred directly to earn the dividend income. However, where such dividend is taxable under the head other sources, the taxpayer can only claim deduction towards interest expenditure incurred to earn that dividend income to the extent of 20% of total dividend income.

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C. Foreign tax credit

There are multiple methods through which the credit of taxes paid outside India can be claimed here in India. These methods can be broadly classified as exemption method, credit method and underlying credit method.

India has recognized the concept of Foreign Tax Credit in the Income Tax Act where it is specifically addressed under section 90 and section 91 of the Income Tax Act.
Section 90 governs the tax credit for countries where India has entered into a tax treaty and while section 91 deals with credit for those cases where no tax treaty is in force with that overseas jurisdiction.

Further, Rule 128 of the Income Tax Rules provide for mechanism to avail the tax credit. Putting the provision of law in place vis the income in nature of dividend received from a US company share, it can be said that the tax deducted on such dividend paid in the US shall be available as a credit against India tax liability.

However, the taxes paid in the US on the profits earned before declaring dividends, and whether such tax shall be available as a credit (underlying tax credit) is a question that has no clarity under the existing foreign tax credit rules.

(Author is Practice leader (International Tax), SW India)

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First published on: 18-10-2022 at 07:46:00 am