Does the New Income Tax Bill omit deduction for inter-corporate dividends under section 80M? | Mint

The Income Tax Bill, 2025 has omitted the deduction for inter-corporate dividends for companies which opt for 22 per cent tax — permissible under the current legislation, reported Business Line.

Under current law, a company can claim a deduction for dividends received from domestic or foreign companies, or from business trusts, when these dividends are distributed to its shareholders, preventing cascading taxation in multitier structures.

This is provided under Section 80M, introduced by the Finance Act 2020. The aim is to avoid double taxation of dividends.

For example, if company X has shares in company Y, any dividend paid by the latter to company X is considered an inter-corporate dividend. This dividend is exempt from tax and allowed as a deduction.

“This will have far-reaching ramifications, since there will be a cascading effect on taxation of dividends across multiple domestic companies which are subject to the 22 per cent tax rate,” said Himanshu Parekh, Partner, Tax, KPMG in India.

“This appears to be an anomaly, which would need to be addressed before the Bill gets enacted,” he added.

How does it work

If company X earns a dividend income of ₹100, it would typically need to pay tax at a rate of 22 per cent or 30 per cent on that amount.

But if the company disburses the entire ₹100 to its shareholders as dividends, it can claim a deduction, resulting in no taxable dividend income for the company. As a result, the dividend is taxed only at the shareholder level.

Under the Bill, if company A opts for the concessional corporate tax rate of 22 per cent, it would still pay tax on the ₹100 dividend, as the deduction would not be available, reported Business Line.

Double taxation

Also, shareholders would also be taxed on the same ₹100, resulting in double taxation. The benefit of dividend deduction, however, remains available for companies subject to the concessional 15 per cent tax rate.