A S BANKA ADVISORS

If your group runs profit through a holding company, one provision decides whether the same rupee is taxed once on its way up to you, or two and three times over. It is the inter-corporate dividend deduction. Under the old law it lived in Section 80M of the Income-tax Act, 1961. From 1 April 2026 it moves to Section 148 of the Income-tax Act 2025, and while the idea survives intact, one timing condition can quietly forfeit the whole benefit. Here is what founders and group CFOs should actually do about it before FY 2026-27.

Why this deduction matters more than it looks

Since Dividend Distribution Tax was abolished, dividends are taxed in the shareholder’s hands rather than in the paying company’s. For a single company that is clean. Inside a group it creates a cascade. Profit earned in an operating subsidiary is paid up as a dividend to a holding company, and then paid up again to the promoters. Without relief, the same economic profit is taxed in the holding company and again in the promoters’ hands. In a three-tier structure, it is taxed a third time in the middle.

The inter-corporate dividend deduction breaks that chain. It lets an intermediate company deduct the dividend it received, to the extent it passes that money onward. A genuine pass-through dividend is therefore taxed only once, at the top, in the ultimate shareholder’s hands. Section 148 carries this relief into the new Act without a break.

Same idea, new address: Section 80M becomes Section 148

Section 148 of the Income-tax Act 2025, titled “Deduction in respect of certain inter-corporate dividends”, sits in Chapter VIII and applies for FY 2026-27 (AY 2027-28) onwards. For FY 2025-26 and earlier assessment years, the governing provision remains Section 80M of the 1961 Act. The saving provisions of the new Act preserve positions taken under the old law, so a deduction validly claimed under Section 80M for an earlier year is not disturbed. As always, cite the provision that governs the year you are working on.

How the deduction works: three moving parts

• The deduction. Where a domestic company’s total income includes dividend income, it is allowed a deduction equal to that dividend income.
• The cap. The deduction cannot exceed the amount of dividend the company itself distributes to its own shareholders on or before a cut-off date.
• The cut-off. That onward distribution must happen at least one month before the due date for furnishing the return of income under Section 263(1) of the Act 2025.

In plain terms: you get relief on what you pass through, not on what you keep, and only if you pass it through in time.

A worked example: the two-tier holding structure

An operating subsidiary pays a dividend of Rs 100 to its holding company. The holding company redistributes the full Rs 100 to its own shareholders before the cut-off. It claims a Section 148 deduction of Rs 100, its net taxable dividend is nil, and the money is taxed only in the shareholders’ hands. No cascade.

Now change one fact. The holding company receives Rs 100 but distributes only Rs 60 before the cut-off. The deduction is limited to Rs 60. The retained Rs 40 is taxable dividend income in the holding company this year. The relief rewards genuine pass-through and taxes what the intermediate company chooses to accumulate. That is a deliberate design choice, not a loophole.

The one-month rule that quietly forfeits the benefit

This is where the money is won or lost. The onward distribution has to be completed one month before the return due date, not by the return due date itself. For a company whose return is due 31 October, the practical cut-off for the qualifying distribution is on or before 30 September. A dividend declared on 15 October, even though it is before the return is actually filed, does not qualify for that year’s deduction.

The advisory takeaway is simple and non-negotiable: build your holding-company board calendar backwards from this cut-off, not from the filing date. A single dividend resolution passed a few weeks late can turn a fully sheltered pass-through into a taxable receipt.

Two rules that decide who actually benefits

The eligible sources are wider than most assume. The deduction applies to dividends received from another domestic company, a foreign company, or a business trust. So the relief can reach cross-border dividends and REIT or InvIT income, not only dividends from a domestic subsidiary. For groups with overseas holdings or listed trust exposure, that is a meaningful reach.

There is no double-deduction. Once a distributed amount has been allowed as a deduction in one tax year, it cannot be claimed again in any other year. The match is strictly one-to-one between the dividend received and the dividend passed on. You cannot recycle a single onward distribution to shelter dividend income across two years, so clean records matter.

What this means for your group

• Founders with a holding-company structure: this deduction is what keeps your two-tier or three-tier structure tax-efficient. Losing it to a late distribution is an avoidable cost that shows up straight in your effective tax rate.
• CFOs and group controllers: the one-month-before cut-off has to be a hard date in the group dividend policy, owned by a named person and diarised across every intermediate company.
• Advisers to family offices and promoter vehicles: because the relief reaches foreign-company and business-trust dividends, it can shelter cross-border and REIT or InvIT income, which widens the planning conversation.

One caveat worth confirming for your specific facts: the interaction of this deduction with the concessional corporate tax regime should be checked against the enacted text before you rely on it, since the treatment of the deduction under the lower-rate option drew attention during the Bill stage.

Your FY 2026-27 action plan

1. Map every dividend flow in your group, tier by tier, and identify the intermediate companies that receive dividends.
2. Fix the onward-distribution cut-off, one month before each company’s return due date, as a hard board date.
3. Distribute what you intend to shelter before that date; anything retained stays taxable this year.
4. Keep a clean one-to-one record between dividends received and dividends passed on, so no amount is double-claimed.

Get those four things right and the same rupee of group profit is taxed exactly once, which is the entire point of the provision. Get the timing wrong and you pay for it in a way no year-end adjustment can fix.

We have prepared a detailed carousel that walks through Section 148, the worked example, the timing trap, and the action plan. Download the full carousel PDF.

Need help mapping your group’s dividend calendar?

Getting the Section 148 timing right is worth real money in a multi-tier structure. If you are structuring a holding company or planning your group’s dividend flow for FY 2026-27, book a quick call and we will map your dividend calendar against the new due-date cut-off so no deduction slips through: https://calendly.com/asbanka-info/30min.

CA Adityavikram Banka, Founder, A S Banka Advisors Private Limited.

Disclaimer: This article is for general information only and reflects Section 148 of the Income-tax Act 2025 as it stands for FY 2026-27 onwards; Section 80M of the Income-tax Act, 1961 continues to govern earlier years. The interaction with the concessional corporate tax regime should be confirmed against the enacted text for your specific facts. This is not tax advice.