Section 80M of Income Tax Act

Section 80M permits domestic companies to deduct dividends received from subsidiaries from their taxable income. The deduction is limited to the actual dividend amount received, allowing the company to subtract only this specific amount from its total income, thus reducing its overall tax liability.
Section 80M of Income Tax Act
3 min
14-October-2024

Section 80M was introduced by the Finance Act 2020 to provide tax relief for domestic companies receiving dividends from other domestic companies (inter-corporate dividends). The main goal is to avoid double taxation on dividends. This section shifts the responsibility to pay taxes on dividends from the payer to the recipient company. This change helps in reducing the issue of double taxation on the same dividend income.

It must be noted that the provisions of Section 80M apply to dividends that are distributed on or after April 1, 2020. By implementing Section 80M, the government aims to create a more efficient and fair system for taxing dividend income. Let’s understand the key provisions of Section 80M of the Income Tax Act in detail and learn how it helps reduce the overall tax burden on companies by avoiding double taxation.

What is Section 80M of the Income Tax Act?

Section 80M, effective from the AY 2021-22 (FY 2020-21), allows domestic companies to deduct dividends from their taxable income. Usually, this dividend is received from:

  • Other domestic companies
  • Foreign companies, or
  • Business trusts

It is significant to mention that there is no upper limit on the amount of this deduction. However, to claim the deduction, the company must distribute the dividends received to its shareholders at least one month before the company's tax return filing due date.

This way, Section 80M ensures that all eligible inter-corporate dividends are deductible, which helps avoid double taxation on these dividends.

What are inter-corporate dividends?

Inter-corporate dividends refer to dividends received by a company due to its ownership of shares in another company. For example:

  • Say Company A owns shares in Company B.
  • Now, any dividend paid by Company B to Company A is considered an inter-corporate dividend.
  • As per Section 80M of the Income Tax Act, if a company receives such inter-corporate dividends on or after April 1, 2020, these dividends are exempt from tax and are allowed as a deduction.

Eligibility and scope of Section 80M

  • This section applies to domestic companies that both:
    • Declare dividends to their shareholders
      and
    • Receive dividends from other domestic companies, including subsidiaries.
  • The deduction a company can claim is limited to the amount of dividend it distributes to its own shareholders.
  • This distribution must happen on or before the due date for filing the company's income tax return.
  • The deduction under Section 80M is available to all eligible domestic companies, regardless of the tax regime they follow (whether they pay tax under the old or new tax regime).

Applicability of Section 80M

The provisions of Section 80M of the Income Tax Act apply to domestic companies that both:

  • Receive dividends from other domestic companies
    and
  • Declare dividends to their shareholders.

Such a domestic company can get a tax deduction under Section 80M if it receives a dividend and then distributes this dividend to its own shareholders. Also, this distribution must happen at least one month before the company's income tax filing deadline. Furthermore, this rule applies to any dividends distributed on or after April 1, 2020, which means it starts affecting the assessment year 2021-22 and onwards.

Also read: Section 112A of Income Tax Act

Purpose of reintroducing Section 80M

The primary purpose of the reintroduction of Section 80M is to shift dividend tax liability from the payer to the recipient company and eliminate double taxation of dividends. For more clarity, let’s understand the taxation situation both before and after the introduction of Section 80M:

Law before Section 80M

Before the reintroduction of Section 80M, there was an earlier version of this section. However, it was removed when the Dividend Distribution Tax (DDT) was introduced in 2003. DDT required companies to pay tax on the dividends they distributed. This kind of levy made it easier for the tax authorities to:

  • Collect taxes at a single point
    and
  • Avoid tracking the dividend incomes of individual shareholders.

Also, under DDT, shareholders did not have to pay tax on the dividends they received. To prevent double taxation, holding companies could deduct the amount of dividends received from their subsidiaries when calculating their DDT liability. This deduction was allowed as the subsidiaries had already paid DDT on those dividends.

This DDT rule ensured that the same dividend income was not taxed twice. However, this relief was only available to:

  • Holding companies
    and
  • Their subsidiary companies

Also read: Section 111A of Income Tax Act

Law after re-introduction of Section 80M

Applicable from AY 2021-22 (FY 2020-21), Section 80M was reintroduced and shifted the responsibility of paying tax on dividends from the company that pays the dividend to the company that receives it. Thanks to modern technology, it is now possible to track dividend income more effectively, which has made the older system of Dividend Distribution Tax (DDT) unnecessary.

Moreover, this new rule expands the deduction for dividend income to all domestic companies and not just those with a parent-subsidiary relationship. As a result, it helps prevent double taxation on dividends for a wider range of companies.

Quantum of tax deduction

Under Section 80M, the domestic companies are allowed to claim the least of the following as tax deductions:

  • The amount of dividend it has received from other domestic companies
    or
  • The amount of dividend it distributes to its own shareholders at least one month before the tax filing due date.

This section effectively shifts the responsibility for paying tax on dividend income from the company that pays the dividend to the company that receives it. Furthermore, under the old system with Dividend Distribution Tax (DDT), the paying company was taxed, which led to double taxation of the same income. Section 80M eliminated this drawback by ensuring that:

  • Dividends are taxed only once, in the hands of the recipient company
    and
  • Taxed at the recipient’s applicable income tax slab rate instead of a flat DDT rate.

How to calculate a deduction under Section 80M?

Under Section 80M, a domestic company can deduct the lesser of either the dividends it receives from other domestic companies, foreign companies, or business trusts or the dividends it distributes to its own shareholders. Let’s understand this calculation better through some easy steps:

  • Step I: Determine the dividend received
    Find out the total amount of dividends a domestic company has received from another domestic company, a foreign company, or a business trust.
  • Step II: Determine the dividend distributed
    Find out the total amount of dividends declared and distributed to the shareholders at least one month before the tax filing due date.
  • Step III: Calculate the deduction
    The deduction you can claim under Section 80M is the lesser of the two amounts determined in steps 1 and 2.

For more clarity, let’s study a hypothetical example:

Say ‘X Ltd.’ is a domestic company with a 100% domestic subsidiary ‘Y Ltd.’ During the financial year 2021-22, X Ltd. received a dividend of Rs. 20 lakhs from Y Ltd. On May 15, 2022, X Ltd. declared and distributed a dividend of Rs. 12 lakhs to its own shareholders.

Now, we can observe that:

  • Dividends received by X Ltd. is Rs. 20 lakhs
    and
  • Dividends distributed by X Ltd. is Rs. 12 lakhs

As per Section 80M of the Income Tax Act, the lesser of the above two amounts can be claimed by X Ltd. as deductions. So, X Ltd. can deduct Rs. 12 lakhs from its taxable income computed for the financial year 2021-22.

Also read: Section 56 of Income Tax Act

Conclusion

Section 80M of the Income Tax Act was introduced by the Finance Act 2020 and is applicable from the assessment year 2021-22. This section eliminates double taxation by shifting the responsibility of dividend tax payment from the payer to the recipient company. This rule allows domestic companies to deduct either the dividends received or distributed, whichever is lower, from their taxable income. This deduction reduces their tax burden.

Previously, the Dividend Distribution Tax (DDT) system taxed the distributing company, which led to double taxation on the same dividend income. Section 80M addresses this by ensuring dividends are taxed only once, at the recipient's applicable tax rate. This change benefits all domestic companies as well as promotes fairness and efficiency in tax administration.

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Frequently asked questions

What is section 80M pertaining to income tax deduction?

Section 80M allows domestic companies to deduct dividends received from other domestic companies, foreign companies, or business trusts from their taxable income. This deduction helps in avoiding double taxation on the same dividend income.

What are the conditions for claiming deductions under Section 80M?

To claim a deduction under Section 80M, the domestic company must receive the dividend from other domestic companies, foreign companies, or business trusts. Also, it must be distributed to shareholders at least one month before the due date for filing the company's tax return.

What is the primary purpose of Section 80M?

The primary purpose of introducing Section 80M was to shift the tax liability on dividends from the payer to the recipient company. This move eliminated double taxation and promoted fairness.

Which types of dividends are eligible for deduction under Section 80M?

Under Section 80M, dividends received from other domestic companies, foreign companies, or business trusts are eligible for deduction.

What is the effective date for claiming deductions under Section 80M?

Section 80M is applicable to inter-corporate dividends received on or after April 1, 2020. This section is effective from the AY 2021-22 (FY 2020-21).

How does a company claim a deduction under Section 80M?

A domestic company can claim a deduction under Section 80M, which is lower of the dividend received from other specified entities and the dividend distributed to its own shareholders (at least one month before the tax filing due date).

Does Section 80M apply to dividends received from mutual funds?

No, Section 80M specifically applies to dividends received from domestic companies, foreign companies, or business trusts. It does not apply to dividend income received from mutual funds.

What documentation is required to support the claim under Section 80M?

To claim deductions under Section 80M of the Income Tax Act, you must accurately fill out the applicable ITR (Income Tax Return) forms and attach supporting documents that demonstrate the receipt and distribution of dividends. Commonly, these documents include dividend vouchers, bank statements showing receipt of dividends, and records of dividend distribution to shareholders.

What is the due date for distributing dividends to claim the deduction under Section 80M?

To become eligible for claiming deduction under Section 80M, dividends must be distributed to shareholders at least one month before the due date for filing the company's income tax return.

Who can claim deductions under Section 80M?

Section 80M is applicable to Indian domestic companies that receive dividends from subsidiaries. To claim, a company must distribute dividends to its shareholders at least one month before the income tax return due date, allowing for deductions based on dividends received.

What are the eligibility criteria for deductions under Section 80M?

To claim deductions under Section 80M, a domestic company must own over 50% of a subsidiary's voting shares, receive dividends on or after April 1, and ensure the subsidiary has paid taxes on its profits, among other conditions.

How is the deduction under Section 80M computed?

The deduction is calculated based on the lower amount of dividends received or dividends distributed. For instance, if a company receives Rs. 10 lakhs in dividends but only distributes Rs. 5 lakhs, the deduction would be capped at Rs. 5 lakhs.

Are there any changes in dividend taxation due to Section 80M?

Yes, Section 80M changes the taxation of dividends by shifting the tax liability from the distributing company to the recipient, ensuring that the tax is based on the recipient's income tax rate, thus avoiding double taxation on the same income.

What happens if a company does not distribute dividends to shareholders?

If a company fails to distribute dividends to its shareholders within the stipulated timeframe, it will not be eligible to claim deductions under Section 80M, as the provision requires redistribution of received dividends for tax benefits.

Is Section 80M applicable to foreign companies?

No, Section 80M specifically applies to Indian domestic companies. Foreign companies do not benefit from this provision and are subject to different taxation rules under the Income Tax Act.

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