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Changes in Interest Computation u/s 234C for Dividend Income: Budget 2021


While presenting the Union Budget 2021-22 on 1st February 2021, Finance Minister during her speech on relief for dividend income also announced that as the amount of dividend income cannot be estimated correctly by the shareholders for paying advance tax, she proposed to provide that advance tax liability on dividend income shall arise only after the declaration/payment of dividend.

For this purpose, relaxation is provided in section 234C of the Income Tax Act, 1961 (“Act”) where the advance tax liability will be computed from the date of receipt of the dividend income. The dividend income will not be considered as income which is earned evenly throughout the year.

This provision will no doubt bring down the interest liability u/s 234C. Presently, the dividend income is considered as annual income even if the income is received in the month March of the financial year.  

One may think it would be a tedious job to determine the quarter-wise dividend income, but with the pre-filling of return for dividend income, this would rather become an easier task to comply.

Advance tax instalment for dividend income

Section 234C of the Act provides for payment of interest by an assessee who does not pay or fails to pay on time the advance tax instalments as per section 208 of the Act. The assessee is liable to pay a simple interest at the rate of 1% per month for a period of three months on the amount of shortfall calculated with respect to the due dates for advance tax instalments. 

The first proviso of the sub-section (1) provides for the relaxation that if the shortfall in the advance tax instalment or the failure to pay the same on time is on account of the income listed therein, no interest under section 234C shall be charged provided the assessee has paid full tax in subsequent advance tax instalments. These exclusions are: - 

(a) the amount of capital gains; or

(b) income of nature referred to in sub-clause (ix) of clause (24) of section 2; or

(c) income under the head "Profits and gains of business or profession" in cases where the income accrues or arises under the said head for the first time; or

(d) income of nature referred to in sub-section (1) of section 115BBDA.

Aforesaid relaxation is to insulate the taxpayers from payment of interest under section 234C of the Act in cases where accurate determination of advance tax liability is not possible due to the intrinsic nature of the income. Therefore, after considering various representations favourably, it is proposed to include dividend income in the above exclusion but not deemed dividend as per sub-clause (e) of clause (22) of section 2 of the Act.

This amendment will take effect from 1st April, 2021 and will accordingly apply to the assessment year 2021-22 and subsequent assessment years.

Section 234C is amended to provide for relief for dividend income from the date of receipt of dividend income vide Clause 53 of the Finance Bill, 2021.

Amendment of section  234C. 

53. In section 234C of the Income-tax Act, in sub-section (1),–


(i) in the first proviso, for clause (d), the following clause shall be substituted, namely:–

“(d) the amount of dividend income,”;

(ii) the Explanation shall be numbered as Explanation 1 thereof and after  Explanation  1  as so numbered,  the following  Explanation shall be inserted, namely: –

‘Explanation 2.––For the purposes of this sub-section, the term “dividend” shall have the meaning assigned to it in clause (22) of section 2, but shall not include sub-clause (e) thereof.’. 

Amended provisions of section 234C explained

Clause 53 of the Bill seeks to amend section 234C of the Income-tax Act relating to interest for deferment of advance tax.

The first proviso to sub-section (1) of the said section provides for categories of incomes for which there will be no charge of interest under the said section, in the event of failure to estimate such incomes resulting in a shortfall in the advance tax payments and tax due has been paid in the subsequent advance tax instalments. 

It is proposed to substitute clause (d) of the first proviso to said sub-section to include dividend income along with capital gains therein, so as to provide that the interest under the said section shall not be applicable to any shortfall in the payment of the tax due on the returned income where such shortfall is on account of under-estimate or failure to estimate dividend. 

It is further proposed to insert Explanation 2 in the said sub-section to define the term “dividend”. 

These amendments will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years. 

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