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Presentation On Dividend Policy

By :- Praveen Dube MBA 3rd Sem

Dividend Policy
When a company distributes its profits among shareholders(equity or preference) it is called distribution of dividend.

Factors affecting dividend policy


Liquidity position of the company. Requirement of funds for expansion. Availability of funds from market. Expectation of investors(shareholders).

Dividend policy and tax consideration


Meaning of dividend under income tax act,1961. Tax implications for company u/s 115-0 and u/s 194(if any). Tax implications for shareholders.

Meaning of dividend under income tax act,1961.


A) Any distribution by a company to its shareholders of accumulated profits entailing release of companys asset. This provisions relates to bonus shares. The 2 conditions which must be fulfilled for including a particular distribution of profits by a company as dividend are : 1) It must be out of accumulated profits and 2) It must entail the release of the assets of the company.[2(22)(a)]

B) Any distribution by company of debentures, debenture stock, deposit certificates in any form, whether with or without interest to its shareholders, and -any distribution of bonus shares to its preference shareholders, -to the extent to which company possesses accumulated profits, whether capitalised or not[2(22)(b)]

C) Any distribution made to the shareholders on the liquidation of the company. Any distribution made by a company to its shareholders on its liquidation to the extent a company possessed accumulated profits before its liquidation shall amount to dividend. It is immaterial whether such accumulated profits are capitalised or not.[2(22)(c)]

D) Any distribution by a company to its shareholders on the reduction of its capital, to the extent to which the company possesses accumulated profits whether capitalised or not.[2(22)(d)]

E) Any payment by a closely held company, of any sum , by may of advance or loan to -a shareholder who is the benificial owner of not less than 10% of shares carrying voting power, or -any concern in which the above shareholder is the member or a partner having substantial interest or -any person on behalf of or for the individual benefit of above shareholder. to the extent to which the company possesses accumulated profits.

Tax implications for company u/s 115-0 and u/s 194(if any).
Case 1:-If company distributing dividend is a domestic company 1) Payment of dividend tax[section 115-0(1)&(2)] 2) Treatment of dividend received by a domestic company from its subsidiary company. Dividend subject to dividend distribution tax =Dividend declared, distributed or paid
during financial year -Dividend received by domestic company from its subsidiary during the financial year

3) Responsibility to deposit tax [section 115-0 (3)] 4) Final payment{115-0 (4)} 5) No deduction[section 115-0 (5)] 6) Applicability of dividend distribution tax on SEZ developers[section115-0 (6) w.e.f. A.Y.2012-2013] 7) Interests payable for non-payment of tax by domestic companies[section 115P] 8) Assessee in default.

Case 2:- Distribution of dividend by a non domestic company 1) No application of section 115-0 :Not required to pay tax on distributed profits. 2) No liability of TDS : Not required to deduct any tax at source before paying dividends.

Tax implications for shareholders


Case 1:- If distributed, declared or paid by domestic company 1) During the period 1-6-97 to 31-3-02 :any dividend except covered u/s 2(22)(e), shall be fully exempt in the hands of shareholders because on such dividend company is liable to pay dividend tax u/s115-0. 2) During the period 1-4-02 to 31-3-03:- such dividend shall be fully taxable as income from other source of the recipient. If net amount received by the shareholders (after TDS) is given then it is to be grossed up. 3) On or after 1-4-03 :- any dividend except covered u/s2(22)(e), shall be fully exempt in the hands of shareholders because on such dividend company is liable to pay dividend tax u/s115-0.

Case 2:- In distributed, declared or paid by non domestic company Any dividend received from non domestic company shall be fully taxable in the hands shareholders and shall be treated as his income other sources. A foreign company is not required to deduct tax at source u/s194 in respect of dividend distributed by it.

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