Section 4A of PSRD Act, 1960 : Section 4A: Deduction Of Income-Tax

Explanation using Example

Imagine a company called XYZ Corp. has issued preference shares with a dividend rate of 8% per annum. The dividend is declared to be subject to income tax, and as per the company's policy, the tax is deducted at source before distribution to the shareholders.

For the financial year ending on March 31, 2023, XYZ Corp. announces a dividend on these preference shares. The stipulated dividend for a shareholder holding 100 preference shares with a face value of $100 each would be $800 (8% of $10,000).

According to Section 4A of The Preference Shares (Regulation of Dividends) Act, 1960, XYZ Corp. can deduct income tax from the dividend before paying it to the shareholder. However, the deduction cannot exceed 27.5% of the aggregate of the stipulated dividend plus an additional 11% of the stipulated dividend.

In this case, the maximum income tax XYZ Corp. can deduct from the shareholder's dividend would be 27.5% of ($800 + $88), which equals $244.20. Therefore, the shareholder would receive $800 - $244.20 = $555.80 as the net dividend after the income tax deduction.