Section 80M Income Tax Act: Eligibility & Applicability

The Finance Act 2020 introduced Section 80M into the Income Tax Act of 1961 to streamline business tax processes. This section is focused on easing the tax and compliance load on corporations, making it easier for them to handle their taxes.

Section 80M supports economic growth by simplifying these procedures, helping businesses navigate the tax system more efficiently and hassle-free.

What Is Section 80M of the Income Tax Act?

The Finance Act of 2020 introduced Section 80M into the Income Tax Act of 1961 as part of efforts to boost economic growth and streamline tax administration. This provision aims to ease the tax and compliance burdens on corporate entities.

By implementing Section 80M, the government seeks to simplify the tax process for businesses, make it easier to comply with regulations and reduce overall administrative hassle. The ultimate goal is to support economic growth by making the tax system more efficient and manageable for companies.

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Applicability of Section 80M

Section 80M of the Income Tax Act applies to domestic companies that receive dividends from other domestic companies and also declare dividends themselves. This section allows these companies to claim a deduction for the dividends received, provided they redistribute these dividends within one month before the filing date. This rule applies to dividends distributed on or after April 1, 2020 (Assessment Year 2021-22 onwards).

What are Inter-Corporate Dividends?

Inter-corporate dividends refer to dividends paid between companies. This happens when one company receives a dividend due to its ownership of shares in another company.

Who Is Eligible To Claim Benefits Under Section 80M?

Eligibility: Section 80M of the Income Tax Act is designed for Indian companies that receive and pay dividends. If a company receives dividends from another Indian company and subsequently pays dividends to its shareholders, it can claim a tax deduction.
Condition: To qualify for this deduction, the company must distribute these dividends to its shareholders at least one month before the income tax return filing deadline.
Effective Date: This rule applies to dividends distributed on or after April 1, 2020, beginning with the assessment year 2021-22.

What Types of Income Are Covered Under Section 80M?

Income Type: Section 80M allows a domestic company to deduct the amount of dividends it receives from its subsidiary from its taxable income.
Deduction Limit: The deduction is capped at the amount of dividend received, meaning the company can only subtract the actual dividend amount from its total income.
Purpose: This provision helps avoid double taxation, ensuring that the same income isn’t taxed both in the hands of the subsidiary and the parent company. By using Section 80M, a domestic company can lower its tax liability by reflecting the received dividends as a deductible amount from its total income.

Purpose of Reintroducing Section 80M

Before Section 80M:

Section 80M existed earlier but was removed when the Dividend Distribution Tax (DDT) was introduced in 2003.
DDT made it easier to collect tax by taxing dividends at the company level, avoiding the need to track individual shareholder dividends.
Under DDT, dividends were taxed at distribution and were tax-exempt for shareholders.
Holding companies could deduct DDT on dividends received from subsidiaries, which led to double taxation in holding subsidiary structures.

After Reintroducing Section 80M:

Section 80M was brought back to shift the tax burden from the company paying the dividend to the recipient (shareholder).
With better technology, tracking dividend income became possible, making DDT unnecessary.
The new Section 80M allows all domestic companies, not just those in holding-subsidiary relationships, to claim a deduction on dividend income, reducing the chances of double taxation.

Quantum of Tax Deduction Under Section 80M

Under Section 80M of the Income Tax Act, domestic companies can claim a deduction based on the lesser of:

The amount of dividend received from other domestic companies or
The amount of dividend distributed within one month before the due date for filing the income tax return.

This shift in tax incidence means that dividends are now taxed in the hands of the recipient rather than being subject to double taxation through Dividend Distribution Tax (DDT). Previously, DDT was a flat rate with no consideration for the recipient’s marginal tax rate, but now, dividend income is taxed according to marginal tax rates.

How to Calculate Deduction Under Section 80M?

To calculate the deduction under Section 80M, you would deduct the lesser of the dividend received from another domestic or foreign company, business trust, or the amount distributed by your company.

Example: Suppose Z Ltd., a domestic company, received a dividend of ₹12 lakhs from A Ltd., another domestic company. Z Ltd. then declared and distributed ₹7 lakhs as a dividend within the stipulated time frame.

In this scenario, Z Ltd. would be eligible for a deduction of ₹7 lakhs under Section 80M, as this is the amount they declared and distributed as a dividend.

Deduction under Section 80M

Section 80M of the Income Tax Act allows a domestic company to claim a deduction on any dividend received from its subsidiary. The deduction is available up to the amount of the dividend received.

To claim this deduction, the following conditions must be met:

The domestic company must hold more than 50% of the voting power in the subsidiary.
The dividend must be part of the domestic company’s total income.
The dividend should be received on or after April 1, 2021.
The domestic company should not be one in which the public has a substantial interest.
The subsidiary company should have paid tax on its profits.
The domestic company must provide a declaration to the subsidiary company confirming that it meets the conditions under Section 80M.

Documentation Requirements for Claiming Deductions Under Section 80M

To claim deductions under Section 80M of the Income Tax Act, 1961, which applies to dividends received from domestic companies, you’ll need to ensure you have the right documentation:

Proof of Dividend Receipts: Ensure you have proper documentation showing the dividends you’ve received from domestic companies. This could be in the form of bank statements or dividend certificates.
Investment Proof: If you claim deductions on investments made from the dividend income, such as in mutual funds or specified securities, keep records like statements or certificates to support your claim.
Accurate Calculation: Carefully calculate the deduction amount as per the provisions of Section 80M. You must know the eligible deduction and the applicable rules to avoid errors.
Filing Requirements: When filing your income tax return, make sure to include all necessary details related to Section 80M deductions. Fill out the ITR forms correctly and attach the supporting documents.
Bank Statements: Keep a record of bank statements or any other proof of transactions related to the dividend income and investments made from that income.
Dividend Declarations: Sometimes, you might need statements or certificates from the companies that issued the dividends to validate the amounts received.

Procedure for Computing Deduction Under Section 80M

Let’s say a domestic company, A, received a dividend of ₹10 lakhs from another domestic company, B, during the financial year 2021-22. On May 15, 2022, Company A declared and distributed ₹5 lakhs as dividends.

Under Section 80M, Company A can claim a deduction on the dividends received from Company B. However, the deduction is limited to the lower of the dividends received or distributed. Since A received ₹10 lakhs but only distributed ₹5 lakhs, the deductible amount under Section 80M would be ₹5 lakhs.

Conclusion

The taxation of dividends has evolved to make the system fairer. Instead of the company paying tax on distributed dividends, the tax responsibility falls on the recipient, based on their own tax rate. This change helps to avoid double taxation and ensures that the tax paid aligns more closely with the recipient’s actual income level.