Section 80M: Dividend Deduction for Domestic Companies

What is Section 80M of the Income Tax Act?

When companies earn profits, they pay corporate tax to the government. If they share part of these profits with shareholders in the form of dividends, shareholders are also taxed on the dividend income. Now imagine if one company receives dividends from another company and then pays dividends to its own shareholders, the same money gets taxed at multiple levels. This is called double taxation of dividends.

To solve this problem, Section 80M was created. It allows a domestic company to claim a deduction for the dividend it receives from another domestic company, as long as it passes that dividend on to its own shareholders within a certain time.

The main purpose is simple: no double taxation of the same dividend income.

Re-introduction of Section 80M in Finance Act 2020

Section 80M isn’t new. It existed earlier but was removed after changes in how dividends were taxed. Earlier, companies had to pay Dividend Distribution Tax (DDT), so double taxation was not a big issue.

However, in the Finance Act 2020, the government abolished DDT and shifted the tax liability back to shareholders. With this change, dividend income became taxable in the hands of shareholders and also in the hands of companies receiving dividends. To avoid cascading tax, Section 80M was re-introduced from April 1, 2020.

Applicability of Section 80M

Who Can Claim This Deduction?

Section 80M is applicable only to domestic companies registered in India. Individuals, partnership firms, LLPs, and foreign companies cannot claim this benefit.

So, if you are a shareholder receiving dividends directly, Section 80M does not apply to you. It is only meant for corporate entities that receive and distribute dividends.

Nature of Dividends Covered

The deduction applies only to dividends received from other domestic companies. For example:

• If Company A receives a dividend from Company B (both registered in India), Company A can claim deduction under Section 80M.
  
• But if Company A receives a dividend from a foreign company, the deduction is not available.

Deduction Available Under Section 80M

100% Deduction of Dividend Distributed

The beauty of Section 80M is that the deduction is 100% of the dividend amount, but with a condition.

A company can deduct from its taxable income the entire amount of dividend it distributes to its shareholders, provided it has already received that dividend from another domestic company.

The Limit – Lower of Dividend Received or Dividend Distributed

There is a limit to avoid misuse. The deduction is the lower of:

• The dividend income received from other domestic companies, or
  
• The amount of dividend distributed by the company before the due date of filing its income tax return.
  

This means a company cannot claim more deduction than the dividend it actually received or passed on.

Conditions for Claiming Deduction

Dividend Must Be Received from Another Domestic Company

Only dividends received from domestic companies qualify. Dividends from mutual funds, foreign companies, or other sources are not eligible.

Dividend Must Be Further Distributed Before Due Date of Filing Return

Timing is very important. For a company to claim deduction:

• The dividend received must be further distributed to its shareholders.
  
• This distribution must happen on or before the due date of filing the company’s income tax return (generally September/October, depending on audits).
  

If the dividend is distributed late, the company loses the benefit.

Benefits of Section 80M

Avoids Cascading Effect of Dividend Taxation

Without Section 80M, the same money could be taxed two or even three times as it moves between companies and shareholders. This rule ensures fairness in taxation.

Encourages Corporate Investments

Companies often invest in other companies for strategic growth. Section 80M makes such investments more attractive by ensuring they don’t suffer unnecessary tax losses.

Exclusions and Limitations

Deduction Not Available if Dividend is Not Redistributed

The deduction is tied to redistribution. If the company chooses to keep the dividend for itself, no deduction is allowed.

Applies Only to Domestic Companies

Foreign companies, individuals, HUFs, partnership firms, and LLPs cannot claim this deduction.

Not Applicable to Other Types of Income

The benefit is available only for dividend income. Other incomes like interest, rent, or capital gains do not qualify.

Common Mistakes by Companies

Missing the Distribution Deadline

One of the most common mistakes is missing the due date for distribution. Even a one-day delay can cost the company its entire deduction.

Assuming Deduction Applies to All Dividend Income

Many companies assume that any dividend income is deductible. But only dividends received from domestic companies and further distributed before the due date are eligible.

Not Maintaining Proper Records

Companies sometimes fail to keep clear documentation of dividend receipts and distributions. This can create issues during assessment.

Key Takeaways for Domestic Companies

Timely Distribution is Crucial

The timing of dividend distribution is as important as the amount. Companies should plan ahead to ensure compliance.

Deduction Ensures Fair Taxation

Section 80M makes sure that companies are not unfairly taxed multiple times on the same dividend.

Helps in Better Tax Planning

By understanding Section 80M, companies can structure their dividend policies smartly to maximize tax benefits.

Additional Insights You Should Know

Connection with Abolition of Dividend Distribution Tax (DDT)

The abolition of DDT shifted the burden of taxation. Section 80M balances this shift by ensuring companies are not penalized when they pass on dividends.

Difference Between Section 80M and Section 80G/80C

• Section 80M is for companies and deals with dividends.
  
• Section 80C and 80G are for individuals and taxpayers (investments, donations, etc.).

Importance for Holding Companies

Holding companies that own shares in multiple subsidiaries benefit the most. Without Section 80M, holding companies would face heavy tax bills.