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As a taxpayer, you can claim certain deductions of expenses while calculating the ‘income from other sources’. Such deductions fall under Section 57 of the Income-tax Act, 1961 (ITA).
Let’s gain insight on various deductions that are allowed to a taxpayer under Section 57 while computing any income chargeable under the head, ‘income from other sources’.
The Finance Act, 2020 amended Section 57(i), effective from April 1, 2021. As per this, a taxpayer can claim a deduction of interest expenses for earning a dividend income. Interest on money borrowed for investing in the shares can be claimed as a deduction subject to a maximum of 20% of dividends or income in respect of units of a mutual fund.
However, a shareholder is not permissible to further claim a deduction for any other expenditure paid for gaining the dividend income.
Before this, dividend income remained exempt in the hands of shareholders under Section 10(34). The company had to pay tax on such dividends under Section 115-O.
In other words, a taxpayer cannot claim a deduction of any expense against dividend income, except interest expense on cash borrowed for investment. The deduction of interest expense will also be subject to a maximum limit of 20% of the amount of gross dividends. In the hands of a taxpayer, the dividend income will be taxable, irrespective of the sum received at applicable income tax slab rates.
For example, an individual received a dividend of Rs 20,000 from a domestic company on April 15, 2021. The company will deduct tax at 10% as the dividend amount exceeds Rs 5,000. The individual will receive the balance amount as a dividend, which is Rs 18,000 (20,000-Rs 2,000).
Now, suppose the individual borrowed some funds to invest in equity shares and paid interest of Rs 6,000 during the financial year. So, as per the amendment to Section 57, the deduction should not exceed 20% of the amount of gross dividend. In this case, only Rs 4,000 (20% of Rs 20,000) is allowed as an interest deduction.
The taxpayer can approach the Commissioner of Income-tax (Appeals), who is the first appellate authority. The Central Board of Direct Taxes (CBDT) has issued a form of appeal, Form No. 35.
Deduction on family pension is calculated based on an annual amount and not on a monthly total.
Pension is treated as salary as it is a benefit an employee draws after retiring, while in the case of family pension the retirement benefit is passed on to the family members after the demise of the individual. Family pension is treated as income.