The word ʹdividendʹ originates from the Latin word ʹdividendum,ʹ which literally means ʹto divide.ʹ Dividends are the portions of a companyʹs profits that are distributed to its shareholders. Companies that make a profit can opt to reinvest it in the firm, pay it to shareholders, repurchase shares, or pay off their obligations after paying their creditors. A dividend is a compensation paid to the shareholders of a firm. These payments are typically given in cash, known as a cash dividend or dividend payout, but they may also choose to make these distributions in the form of stocks, known as a stock dividend.
When it comes to deciding which stocks to invest in, the dividend yield is frequently a key element. The current share price is used to determine the dividend yield.
If XYZ Ltd distributes a dividend of Rs.5 per share and the shareʹs market value is Rs.250, then:
Dividend Yield is computed by dividing the full-year dividend by the current share price.
In this example, itʹs as follows: 5 /250 = 0.02 percent or 2%
Dividends must be paid within 30 days of the proclamation date. The dividend shall be paid to the shareholder who is entitled to receive the dividend in cash; however, dividends payable in cash may also be paid by cheque, warrant, or other electronic means to the shareholder who is eligible to receive the dividend.
Dividends do not affect a companyʹs share priceʹs fundamental value. Companies that are in the initial stages of their life cycle and are experiencing rapid growth opt to reinvest the majority of their revenues back into the business to help it develop. To recognize loyal shareholders, well-established companies pay regular dividends.
The taxability of a dividend will be determined by whether the recipient is a trader or an investor in securities. The money derived from trading activities is taxable under the category of business income. As a result, if shares are retained for trading purposes, dividend income is taxable as income from a company or profession. If shares are held as an investment, dividend income is taxable under the heading of income from other sources.
When a dividend is taxed as business income, the assessee can claim deductions for all such expenses incurred to earn that dividend income, such as collection fees, interest on a loan, and so on. If the dividend is taxable as income from other sources, the assessee can deduct just the interest expense required to earn the dividend income up to 20% of the total dividend income. Any additional expenses, such as commission or remuneration given to a banker or any other person for the purpose of realizing such dividend, are not deductible.
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