Section 80M deduction
Also written Section 80M · 80M deduction · Deduction for inter-corporate dividend
A deduction that stops the same dividend being taxed twice in a corporate chain: an Indian company that receives dividend from another Indian company and passes it on in time can deduct what it received.
In plain language
Since dividend distribution tax was removed, dividend is taxed in the hands of the shareholder. That creates a problem when the shareholder is itself a company.
Picture a holding company. Its subsidiary pays it a dividend, which is taxable. The holding company then pays a dividend to its own shareholders, which is taxable again. The same rupee is taxed at every level of the chain.
Section 80M cuts that short. An Indian company that receives dividend from another Indian company, and distributes dividend to its own shareholders before a specified date, can deduct the dividend it received.
So tax is paid once, by whoever finally keeps the money.
The condition is the timing. The onward dividend must be paid before the specified due date, which the workbook fixes as one month before the date for filing the tax return under Section 139.
How it works
The provision (Chapter 10, section 10.2.2). As per Section 80M of the Income-tax Act, any Indian company which receives dividend from another Indian company, and the dividend is distributed by the first-mentioned Indian company to its shareholders before the specified due date, then that first company can claim a deduction of the dividend received by it from the other Indian company.
The specified due date. The workbook defines it in the text: one month prior to the date of filing the tax return under Section 139 of the Act.
The surrounding dividend rules that shape the arithmetic. Section 115-O means the Indian company declaring a dividend is not required to pay dividend distribution tax; the dividend is taxable in the shareholder's hands at applicable rates. A shareholder may claim a deduction for interest expenditure incurred to earn the dividend income, restricted to 20% of the gross dividend income.
Tax deduction at source on the dividend paid. The company declaring the dividend must deduct tax at:
| Payee | TDS rate |
|---|---|
| Resident investors, where the amount exceeds INR 10,000 | 10% |
| Non-resident investors | 20% or rates in force |
| FPIs, under Section 196D | 20% plus applicable surcharge and cess, unless a lower rate applies under the relevant tax treaty |
The rate the dividend is then taxed at. For resident companies and for firms and LLPs, 30%; for others, applicable slab rates with a maximum of 30%, subject to the Section 115BAC regime note. A domestic company with turnover or gross receipts not exceeding INR 400 crores in Financial Year 2022-23 pays 25%, and one opting for Section 115BAA or 115BAB pays 22% or 15%.
What the deduction is limited to. The deduction is of the dividend received. It is not a deduction of the dividend distributed, and the workbook does not describe any carry-forward of an unused amount.
A worked example
Illustrative figures applying the workbook's rule. Konkan Holdings Ltd owns shares in two Indian operating companies and has no other income. Its return under Section 139 is due on 31 October, so its specified due date for Section 80M is 30 September.
| Item | Amount |
|---|---|
| Dividend received from Sahyadri Cements Ltd | Rs 4,00,00,000 |
| Dividend received from Deccan Logistics Ltd | Rs 1,50,00,000 |
| Total dividend received | Rs 5,50,00,000 |
| Dividend declared and paid to its own shareholders on 12 September | Rs 4,20,00,000 |
The deduction. Konkan Holdings distributed Rs 4,20,00,000 before 30 September. Section 80M allows it to deduct the dividend received, to the extent it has passed dividend on — Rs 4,20,00,000 of the Rs 5,50,00,000.
| Amount | |
|---|---|
| Dividend income | Rs 5,50,00,000 |
| Less Section 80M deduction | Rs 4,20,00,000 |
| Taxable dividend | Rs 1,30,00,000 |
| Tax at 30% | Rs 39,00,000 |
Without Section 80M, tax at 30% on the whole Rs 5,50,00,000 would be Rs 1,65,00,000 — and the Rs 4,20,00,000 would be taxed again in its shareholders' hands. The deduction saves Rs 1,26,00,000 at this level of the chain.
Miss the date and it is gone. Had the board paid the same dividend on 9 October, after the 30 September specified due date, the deduction would not be available and the full Rs 1,65,00,000 would fall due.
The TDS side, for completeness. On payment to its own resident shareholders, Konkan Holdings deducts 10% where a shareholder's dividend exceeds INR 10,000. A shareholder receiving Rs 2,00,000 of dividend has Rs 20,000 withheld. An FPI shareholder has 20% withheld under Section 196D, plus surcharge and cess, unless a treaty gives a lower rate.
Why NISM asks about it
Chapter 10 (Taxation), section 10.2.2 (Dividend income), states Section 80M immediately after the Section 115-O point that dividend distribution tax no longer applies. The two belong together: DDT was removed, dividend became taxable in the shareholder's hands, and Section 80M is what prevents cascading in a corporate chain.
Expect a question on who can claim the deduction (an Indian company receiving dividend from another Indian company), on the timing condition (one month prior to the Section 139 return filing date), and on the amount deductible (the dividend received). The neighbouring numbers are equally examinable: the 20% cap on interest expenditure, the 10% TDS above INR 10,000 for residents, and the 20% Section 196D rate for FPIs.
Common exam traps
- Both companies must be Indian. Dividend received from a foreign company does not qualify for the Section 80M deduction as the workbook states it.
- The specified due date is one month before the return filing date, not the filing date itself. A distribution made on the filing date is too late.
- The deduction is of the dividend received. It is capped by the amount of dividend received; distributing more than was received does not create a larger deduction.
- Section 80M is not the 20% interest restriction. That is a separate limit on deducting interest expenditure incurred to earn dividend income, capped at 20% of the gross dividend.
- INR 10,000 is the TDS threshold for resident shareholders, not an exemption from tax. The dividend is taxable from the first rupee; only the withholding starts above the threshold.
- Section 196D's 20% is for FPIs specifically, and a tax treaty can reduce it. The workbook lists 'Section 196D' separately, and this deduction should not be confused with it.
- Section 115-O now means no DDT. Candidates who learnt the old dividend distribution tax answer the opposite of what the workbook says.
Where this is taught
Free preparation for NISM Series XXI-BRelated terms
- Five heads of incomeEvery rupee of taxable income in India falls under one of five heads — salary, house property, business or profession, capital gains, or other sources — and total income is their sum.
- Gross Total Income (Section 80B(5))The total income computed under the Act before any Chapter VI-A deduction — arrived at by adding the five heads of income, clubbing any income the law attributes to the assessee, and setting off losses.
- Residential statusThe classification — resident (ordinarily or not ordinarily), deemed resident or non-resident — that decides which income is taxable in India. Citizenship alone is not the test.
- Indian incomeThe Income-tax Act's shorthand for total income excluding income from foreign sources — the figure tested against Rs 15 lakh in the deemed resident and 120-day residence rules.
- Section 115BAC regimeThe tax regime that applies by default under Section 115BAC(1A) unless the taxpayer opts out under Section 115BAC(6) — and which caps the surcharge at 25% instead of 37%.