As per Section 2(22) of the Income Tax Act, 1961, dividend includes both actual and deemed dividends.

This refers to any distribution by a company out of its accumulated profits (whether capitalized or not), whether in cash or otherwise, to its shareholders.

Example: Final dividend, interim dividend declared by a company to its equity shareholders.

Deemed Dividend [Clauses (b) to (e) of Section 2(22)]

Even if not expressly called “dividend”, the following distributions are deemed to be dividend and are taxable under the Income Tax Act:

🔹 (b) Distribution of debentures or deposit certificates to shareholders:

“Any distribution to shareholders of debentures, debenture stock, or deposit certificates in any form, to the extent it is out of accumulated profits.”

🔹 Tax Treatment: Treated as dividend income.

🔹 (c) Distribution on liquidation:

“Any distribution made to shareholders at the time of liquidation to the extent of accumulated profits (before liquidation).”

🔹 Important: Capital returned in excess of accumulated profits is not treated as dividend.

🔹 (d) Distribution on reduction of capital:

If a company reduces its share capital and pays back shareholders out of accumulated profits, such amount is treated as dividend.

🔹 (e) Loans and advances to shareholders (Deemed Dividend):

This is one of the most litigated and important clauses.

If a closely held company (i.e. company in which public is not substantially interested) gives a loan or advance to:

• A shareholder holding ≥10% voting power, or

• Any concern in which such shareholder is substantially interested
  — then the loan/advance amount is treated as dividend to the extent of accumulated profits.

🛑 Exception: It does not apply to a company in which the public is substantially interested (i.e., a listed company).

📝 Clarification – What is NOT a Dividend (Section 2(22), Provisos):

• Any distribution out of share premium account (Section 52 of Companies Act) – not considered dividend.

• Buy-back of shares u/s 77A of Companies Act, 1956 – not treated as dividend, but subject to capital gains tax.

• Distribution made on preference shares, unless covered under clause (a) to (e) – not deemed dividend.

Steps to Compute the Short-Term Capital Gain (STCG)

Step 1: Determine the Full Value of Consideration

• This is the total sale price received on the transfer of the equity shares or mutual fund units.

Step 2: Deduct the Cost of Acquisition

• Subtract the original cost at which the shares or units were purchased.

• Note: Since the holding period is less than 12 months, no indexation is allowed.

  • Formula: Cost of Acquisition = Purchase Price (as is)

Step 3: Deduct Any Directly Attributable Expenses

• This includes expenses such as brokerage fees, transaction charges, and any other expenses incurred in connection with the sale.

• These expenses are deducted from the sale value.

Step 4: Compute the Net Short-Term Capital Gain

• Formula:
  STCG = (Full Value of Consideration) – (Cost of Acquisition + Directly Attributable Expenses)

Step 5: Taxation of STCG

• The net gain computed in Step 4 is then taxed at the flat rate of 15% under Section 111A.

• After computing the tax at 15%, add applicable surcharge and cess to arrive at the total tax liability.