Question ID :
44805
Foreign Dividend Treatment
An assessee, resident individual, received Dividend on ESOP shares held in US company. They have deducted tax @ 25% in the USA. We have filed the ITR using DTAA rates, but while processing CPC treated it as normal income and taxed at normal rate leading to a tax demand. Please advise, is it correct to treat the foreign dividend as Income Chargeable at Special Rate or should it be at normal rate.
Posted by
CA. VASUDEVAN P K
on
Feb 27, 2025
Filed Under
DIRECT TAXES
Foreign dividends, including dividends received from ESOP shares of a US company, are generally taxable in India under the head "Income from Other Sources."
Taxation of Foreign Dividend:
Tax Rate Under DTAA:
If India has a Double Taxation Avoidance Agreement (DTAA) with the USA (which it does), the tax rate for dividends specified in the DTAA (usually 15%) should apply.
If DTAA benefits are claimed, foreign tax credit (FTC) can be availed for the tax deducted in the USA (25% in your case).
Normal Tax Rate vs Special Rate:
Dividends received from a foreign company are NOT eligible for the concessional tax rate of 20% under Section 115A. This rate applies to dividends received from an Indian company.
Foreign dividends are taxed at normal slab rates applicable to the resident individual.
The special rate of 20% under Section 115BBDA was applicable only to dividends from domestic companies (before its abolition).
CPC’s Processing of ITR:
CPC treating foreign dividends as normal income and taxing at slab rates is correct as per Indian tax laws.
You can still claim Foreign Tax Credit (FTC) under Rule 128, provided you have filed Form 67 and have proof of tax paid in the USA.
Action Steps:
Check if Form 67 was filed before ITR filing (mandatory for claiming FTC).
Verify if foreign dividends were correctly reported under "Income from Other Sources."
Check for mismatch in tax credit claimed vs tax deducted in the USA.
If FTC was disallowed, file a rectification request under Section 154 on the income tax portal.
If rectification is denied, file a grievance or appeal.
Let me know if you need help with rectification or appeal filing!
Posted by
CA. JHA SHANKAR KUMAR on
Feb 27, 2025