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Exemption from TDS on Dividend u/s 194 to Business Trusts: Budget 2021

exemption-from-tds-on-dividend-us-194-to-business-trusts

Budget 2021 has proposed to make the dividend payment to REIT/ InvIT exempt from Tax Deduction at Source (TDS) under section 194 of the Income Tax Act, 1961 (“Act”). This was announced by the Finance Minister while presenting the Union Budget 2021 on 1st February 2021. In other words, the dividend paid to  Real  Estate Infrastructure  Trusts or  Infrastructure Investment  Trusts  (REIT/InvIT)  shall be exempt from TDS.

In her Budget Speech in para 162 under the heading “Relief for Dividend” it was stated that in order to provide ease of compliance, she proposed to make the dividend payment to  REIT/InvIT exempt from  TDS. Relevance extract of Para 162 of the Budget Speech is reproduced below-


Relief for Dividend


162. In the previous Budget, I had abolished the Dividend Distribution Tax (DDT) in order to incentivise investment. The dividend was made taxable in the hands of shareholders.  Now,  in order to provide ease of compliance,  I propose to make dividend payment to  REIT/  InvIT exempt from  TDS. 



Exemption of deduction of tax at source on payment of Dividend to business trust in whose hand dividend is exempt


Section 194 of the Act provides for deduction of tax at source (TDS) on payment of dividends to a  resident.  The second proviso to this section provides that the provisions of this section shall not apply to such income credited or paid to certain insurance companies or insurers. It is proposed to amend the second proviso to section 194 of the Act to further provide that the provisions of this section shall also not apply to such income credited or paid to a business trust by a special purpose vehicle or payment of dividend to any other person as may be notified.



This amendment will take effect retrospectively from 1st April, 2020.


For this purpose, Section 194 of the Act is proposed to be amended vide clause 44 of the Finance Bill, 2021.


Amendment of section 194.


44. In section 194 of the Income-tax Act, in the second proviso, after clause (c), the following clauses shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2020, namely:– 


‘(d) a “business trust”, as defined in clause (13A) of section 2, by a special purpose vehicle referred to in the Explanation to clause (23FC) of section 10; 


(e) any other person as may be notified by the Central Government in the Official Gazette in this behalf.’. 


Clause 44 of the Bill seeks to amend section 194 of the Income-tax Act relating to dividends.


The said section provides for deduction of tax at source on payment of dividends by an Indian company including dividends on preference shares within India. The second proviso to the said section provides that the provisions of that section shall not apply to such income credited or paid to certain insurance companies or insurers.


It is proposed to amend the second proviso to the said section to provide that the provisions of that section shall not apply to such dividend income credited or paid to a business trust as defined in clause (13A) of section 2 by a special purpose vehicle referred to in the Explanation to clause (23FC) of section 10 or any other person as may be notified by the Central government in this behalf.

     

This amendment will take effect retrospectively from 1st April, 2020.

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