TDS on Dividend: Resident and Non Resident Investors
As per the Income Tax Act, 1961, dividends received from a company will be taxable for the investors/shareholders. So, there will be a TDS deduction while paying the interim dividend. The TDS rate varies based on every investor’s residential status and submitted documents. To know more, keep reading!
TDS on Dividend for Resident Investors
As per Section 194 of the Income Tax Act, the TDS rate will be as follows:
| 1 | Investors who didn’t file their ITR for the preceding 2 fiscal years and the last date for it u/s 139(1) is over. The total TDS amounts to Rs. 50,000 or above for each of the 2 preceding years. | 20%* |
| 2 | Investors with invalid or no PAN | 20% or as the Government of India has specified |
| 3 | Investors with valid PAN | 10% or as the Government of India has specified |
No tax deduction will be applicable for dividends paid to resident investors if their dividend income, including an interim dividend in FY 2021-22, doesn’t go beyond Rs. 5,000 or where investors provide Form 15H/Form 15G.
Resident investors can also furnish other documents as specified by the Income Tax Department to claim nil/lower tax. Permanent Account Number is compulsory for investors submitting Form 15H/15G or any such documents.
About Form 15H and Form 15G
Under Section 197A(1C) of the Income Tax Act, Form 15H is applicable for individuals aged above 60 years and who don’t have any tax liability on their income.
Similarly, as per sub-sections (1A) and (1) of Section 197A, Form 15G is applicable for individuals (not firms or companies) who don’t have any tax liability on their income. Furthermore, income should not exceed the tax exemption limit. Investors, based on their suitability, can use both these forms to avoid TDS deduction.
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TDS on Dividend for Non-Resident Investors
As per Section 195 of the Income Tax Act, dividend income will be taxable for non-resident shareholders. The tax rate will be 20% (including cess and surcharge), or as the Government of India specifies.
However, under Section 90, non-resident investors can opt for the provisions related to DTAA (Double Tax Avoidance Agreement) read with MLI between the nation of tax residence of an investor and India. Here, MLI stands for Multilateral Instrument. To claim tax benefits under this provision, non-resident investors should furnish the following documents:
- Self-attested photocopy of PAN that the Indian Income Tax Department has allotted
- Self-declaration through Form 10F
- Self-attested photocopy of TRC (Tax Residency Certificate) received from the Income Tax Department of a nation of which the investor is a resident
- Self-declaration, specifying the following:
- An investor doesn’t have a permanent establishment or a taxable presence in India in FY 2021-22.
- An investor is the ultimate owner of a company’s share and dividend income.
- An investor need not believe that his/her claim for tax benefits is impaired in any way
- A shareholder can opt for the DTAA rate to reduce the tax burden on dividend income from a company.
- An investor is and will be a tax resident individual of his/her country of residence.
For foreign portfolio investors/foreign institutional investors, a tax deduction is applicable as per Section 196D at the rate of 20% (including cess and surcharge) or at a rate specified in the required DTAA read with Multilateral Instrument. A shareholder needs to choose the more fruitful option between the two, provided he/she submits the above-mentioned documents.
Shareholders can avail the beneficial DTAA rate subject to the company’s satisfactory review in relation to the documents furnished.
Applicability of Section 206AB
With effect from July 1 2021, Section 206AB of the Income Tax Act deals with special TDS provisions concerning taxpayers who didn’t file their ITR. The higher of the below-mentioned rates will be applicable as a deduction for payments to specific individuals:
- 5%
- Double the rates or rate in force
- Double the rate prescribed in the required provision of the Act
If Sections 206AB and 206AA are both applicable, that is, an investor hasn’t furnished PAN and filed the ITR, the higher of the 2 specified rates under these sections will be applicable as a deduction.
As per Section 206AB(3), a specific individual implies the following:
- A shareholder who has failed to file ITR for the last 2 years instantly before the preceding year during which tax deduction is required, for which the due date of ITR filing under Section 139(1) has expired
- In cases where the aggregate of TCS and TDS is Rs. 50,000 or above in the 2 preceding years
Final Word
Since April 1 2020, TDS on dividend income has been introduced for the shareholders. As a result, the tax payment burden for dividend distribution has shifted from the company to the shareholders.
FAQs
Ans: Section 206AB(3) does not include non-resident investors who don’t have a permanent establishment in the Indian subcontinent. So, non-resident shareholders who have failed to file their ITR during the previous years can furnish a declaration specifying that they don’t possess a permanent establishment.
Ans: If a resident shareholder’s dividend income goes above Rs. 5,000 in an FY, then 10% TDS will be applicable on such dividend. However, for keeping this tax rate, shareholders will have to update their PAN with the RTA (Registrar and Transfer Agent) or depository.
Ans: A 10% TDS will be applicable on the entire dividend of non-individual resident investors (company, BOI, AOP, firm, HUF). This means that there’s no threshold limit on dividend amount. Note that updating the Permanent Account Number with the RTA/depository is mandatory. Otherwise, a 20% deduction will be applicable.
Ans: Dividends payable to mutual funds and insurance companies are not taxable, provided certain formalities are satisfied.
Section 10, clause (23D) of the Income Tax Act, 1961 specifies the mutual funds for which dividends are not taxable. Such mutual fund schemes must furnish a self-declaration regarding their presence under Section 10(23D) of the Income Tax Act. It involves submitting a registration certificate and a self-attested photocopy of PAN.
Similarly, a dividend income of an insurance company is not taxable, provided it submits a self-declaration stating that it owns the stock and it has complete ownership interest. A self-attested photocopy of PAN is mandatory.
Ans: Income Tax Rule 37BA deals with shares that are held by stockbrokers/intermediaries. A company will apply TDS in the beneficial shareholders’ PAN. In such cases, stockbrokers/intermediaries will require furnishing information related to such shareholders.
Further, they will be submitting a self-declaration stating that those beneficial shareholders are the ultimate owners. So, TDS should be credited to a beneficiary Permanent Account Number.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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