Section 115-O of ITA, 1961 : Section 115-O: Tax On Distributed Profits Of Domestic Companies

Explanation using Example

Imagine a domestic company, ABC Pvt. Ltd., which has made a profit for the financial year 2022-23. The board of directors decides to distribute a part of these profits to its shareholders in the form of dividends. According to Section 115-O of the Income Tax Act, 1961, ABC Pvt. Ltd. is required to pay a tax on these distributed profits at a rate of 15%. This tax is over and above the regular income tax the company pays on its total income.

Let's say ABC Pvt. Ltd. has a subsidiary company XYZ Pvt. Ltd., from which it has received dividends during the financial year. If XYZ Pvt. Ltd. has already paid the tax on distributed profits for these dividends, then ABC Pvt. Ltd. can reduce the amount of dividends received from XYZ Pvt. Ltd. from its own dividend distribution before calculating the tax on distributed profits.

After declaring the dividend, ABC Pvt. Ltd. must pay the tax on distributed profits to the government within 14 days. This tax payment is considered the final payment on the dividends, and neither the company nor the shareholders can claim any further credit or deduction for this tax.

If ABC Pvt. Ltd. were a developer of a Special Economic Zone (SEZ) and distributed dividends from its current income, it would not have to pay this tax on distributed profits for dividends declared up to June 1, 2011, as per the exemption provided in the Act.

Moreover, if ABC Pvt. Ltd. were a unit in an International Financial Services Centre and earned its income solely in convertible foreign exchange, dividends paid by it out of current income would also be exempt from this tax on distributed profits.