Who will pay tax on deemed dividends?
Deemed dividend taxation is an essential aspect of Indian tax law, ensuring that indirect profit distributions are appropriately taxed. The responsibility of paying tax on deemed dividends primarily lies with the recipient of the loan or advance. However, the nature of taxation depends on the recipient's classification and the company's structure.
The table below provides a detailed breakdown of who bears the tax liability and how deemed dividends are treated under different circumstances:
Recipient
|
Taxability
|
Tax Rate & Treatment
|
Individual Shareholder
|
The deemed dividend is taxed in the hands of the individual shareholder as 'Income from Other Sources'.
|
Taxed as per the individual’s applicable income tax slab rates.
|
Concern (e.g., Partnership Firm)
|
If the loan or advance is extended to a firm, association, or entity where the substantial shareholder has significant interest, it is taxed in the concern’s hands.
|
Taxed at the applicable business tax rate of the concern.
|
Company (Publicly Held)
|
Publicly held companies are generally exempt from deemed dividend provisions as they have diversified ownership and public participation.
|
Not applicable
|
Company (Closely Held/Private Limited)
|
If a closely held company provides loans or advances to substantial shareholders (holding at least 10% voting rights), the amount is deemed as dividend.
|
Taxed at 30% under Section 115-O.
|
Hindu Undivided Family (HUF)
|
If an HUF receives a loan from a closely held company, taxation depends on whether a substantial shareholder within the HUF holds a 10% or greater stake.
|
Taxed as per HUF’s income slab rates.
|
Instead of navigating uncertain tax implications, you can lock in Bajaj Finance FDs with a minimum deposit of Rs. 15,000 and watch your wealth grow without risk. Open FD account.
Conclusion
Deemed dividend rules under Section 2(22)(e) prevent companies from bypassing tax by routing profits as loans or advances. For shareholders in closely held companies, understanding these provisions is essential to avoid compliance issues and unexpected liabilities.
By being aware of what qualifies as a deemed dividend—and what does not, you can plan your finances better. And if you are looking for a risk-free, tax-compliant, and transparent investment, Bajaj Finance Fixed Deposits are among the best choices today, offering AAA-rated safety and up to 7.30% p.a. interest. Book FD.
Calculate your expected investment returns with the help of our investment calculators
