Tax on Dividend Income: Sources, Tax Rate and TDS on dividend income
What are Dividends?
Companies may raise funds for running their operations by selling equity. Those who buy these stocks become shareholders in the company. This means they get ownership over a portion of the company. When companies perform well, they may choose to distribute their corporate earnings to shareholders who qualify for it. These payouts are called dividends. Dividends may be issued quarterly as interim dividends (issued before the financial year ends) or as final dividends when the company has completed its accounting. In essence, dividends may be considered as a benefit the company bestows for buying its shares. Some investors even use it as a strategy to earn passive income by planning their investment around companies that regularly issue dividends. However, you may want to note that tax is applicable on dividend income.
Sources of Dividend Income
While the dividend is issued towards shareholding, there are various sources from which an investor may earn dividend income:
- Dividend distribution by a domestic company whose shares the investor holds
- Dividend distribution by an international company whose shares the investor holds
- Returns from equity mutual funds if the investor has chosen the dividend option
- Returns from debt mutual funds if the investor has chosen the dividend option
The applicable tax incidence is determined based on where the dividend income comes from.
Tax on Dividend Income in India
The dividend income taxability depends on whether the recipient is trading securities for business purposes or investment. If the investor holds the shares for trading purposes (short-term), any dividend income gained in the interim is taxable based on norms for business income. On the contrary, if they hold it as an investment (long term), any dividend income earned is taxable based on rules for income from other sources.
When the dividend is taxable as business income, the taxpayer is eligible to claim deductions for all expenses incurred, such as interest paid on loans or costs of collection. However, if the taxability of the dividend is according to rules for income from other sources, the taxpayer can only claim a deduction for interest expenses incurred in earning the dividend income. This is limited to 20% of the total dividend income. Deductions are not allowed for any other expenses, including commissions or charges paid for collecting the dividend.
Tax Rate on Dividend Income
The tax rates on dividends vary depending on the recipient of the dividend and the instrument through which the dividend is distributed. The table below mentions these tax rates:
| Assessee | Nature of dividend | Applicable tax rate |
| Resident | Dividend received from share investments in domestic companies | The normal tax rate that the assessee is subject to |
| NRI | Dividend on GDR of Indian co./PSU (purchased in foreign currency) | 10% |
| NRI | Dividend received on shares of an Indian company that have been purchased using foreign currency | 20% |
| NRI | Any other Dividend income | 20% |
| FPI | Dividend on securities other than 115AB | 20% |
| Investment Division of the offshore banking unit | Dividend on securities other than 115AB | 10% |
Source of data:
TDS on Dividend Income in India
The Finance Act of 2020 introduced various provisions for tax on dividend income. This includes the imposition of TDS on dividends paid by organizations and mutual fund houses on or after April 1, 2020. The TDS rate on dividends of Rs 5,000 or more paid by organizations and mutual fund houses is usually 10%. However, resident Indians can claim the TDS deducted as a credit from the total tax liability while filing ITR.
1. TDS for Resident Indians
The TDS rate for dividend distribution from May 14, 2020, until March 31, 2021, was reduced to 7.5% to provide relief to investors.
The dividend tax-free limit or threshold of Rs 5,000 does not apply to HUF, firms, companies, trusts, etc. The TDS will be charged on the entire dividend amount.
The Rs 5,000 threshold is applicable only if the individual shareholder provides PAN; otherwise, the TDS rate will be 20%.
TDS deducted will be available as a credit from the taxpayer’s total tax liability while filing ITR.
2. TDS for Non-Resident Indians (NRIs)
The TDS rate for NRIs is 20%, and it is subject to the Double Taxation Avoidance Agreement (DTAA), if any.
The NRI can avail of the lower tax deduction benefits owing to any favorable treaty with the country where they live. However, to do so, they need to produce proof in the form of documents such as Form 10F, beneficial ownership declaration, tax residency certificate, etc. or it would lead to a higher TDS reduction from the dividend. NRI taxpayers can claim it while filing ITR.
There is also a surcharge (applicable as per different slab rates) and health and education cess of 4% applicable on the dividend income received by NRIs.
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Dividend Received from Foreign Company
Resident taxpayers must pay income tax on dividends received from foreign companies. Such dividends are considered income from other sources and are taxed based on the applicable rates.
For example, if the taxpayer falls under the 30% tax slab rate, then the foreign dividend income will also be taxed at 30%. Additionally, they will have to pay the cess applicable.
The taxpayer is also eligible to claim a deduction for the interest paid, with a limit of 20% of the gross dividend income.
The foreign company that offers the dividend will deduct TDS based on section 194 of the Income-tax Act, 1961. For individuals, 10% TDS will be deducted from dividend income above Rs. 5,000. If the recipient of the dividend income does not provide PAN details, the TDS rate increases to 20%.
When to Tax Dividend Income?
Dividend income is generally taxable in the year of declaration, distribution, or payment by the company, whichever is earlier. Final dividends, including deemed dividends, fall under this category. On the other hand, interim dividends are taxable in the preceding year in which the amount of dividend is released by the company to the shareholder. This means that interim dividends are chargeable to tax on a receipt basis. Overall, the taxation of dividend income depends on the type of dividend and the account from which it is received. A tax professional or financial advisor can offer better clarity on the specific tax implications of your dividend income.
Submission of Form 15G/15H
Non-resident assessees who receive dividends from Indian companies must submit form 15G/15H to claim dividend income without TDS. They must submit the form within 90 days of receiving the dividend. If the assessee is not a resident of India or does not have a permanent establishment in India, they can claim exemption from tax. However, if they do not meet these criteria, they would incur tax on dividend income. A resident of India with an approximate annual income lower than the exemption limit can submit Form 15G to the company or mutual fund house that pays the dividend. A senior citizen who has no estimated annual tax payable can give Form 15H to the dividend-paying company.
Advance Tax on Dividend Income
When an individual sells a stock, they may be required to pay advance tax on any dividends received from the sale. The government imposes an additional tax on dividend income, a fixed rate of 15% or 20%. This varies based on the type of dividend received. If there is a shortage in the advance tax installment or it is not paid on time, no interest will be charged under Section 234C if the individual pays the full tax in subsequent advance tax installments. However, this exemption is not applicable for deemed dividends as mentioned in Section 2(22)(e).
Final Word
Dividends are payouts made by companies to shareholders as a reward for their investment in the company. The taxability of dividend income in India depends on the source of the earning, and whether the recipient is into securities trading or investment. The tax rates on dividends also vary based on the nature of the dividend and the instrument through which it is distributed. The Finance Act of 2020 introduced TDS on dividends paid by companies and mutual funds, and the TDS rate varies based on the residential status of the recipient.
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FAQs
Investors can earn dividends from domestic and international companies whose shares they hold, as well as from equity and debt mutual funds if they have chosen the dividend option.
Yes, investors in India need to pay taxes on dividend income. The tax incidence depends on whether the recipient is engaged in securities trading as a trader or as an investor. The tax rates also vary depending on the type of recipient and the instrument through which the dividend is distributed.
The Finance Act of 2020 introduced various provisions for TDS on dividends paid by companies and mutual funds. The TDS rate on dividends of Rs 5,000 or more paid by companies and mutual funds is usually 10%. The TDS deducted is available as a credit from the taxpayer’s total tax liability when they file ITR.
The tax rate on dividend income for NRIs is 20%, and it is subject to the Double Taxation Avoidance Agreement (DTAA), if any. NRIs can avail of lower tax deduction benefits owing to any favorable treaty with the country of residence. Additionally, NRIs must also pay an additional surcharge based on different slab rates and a health and education cess of 4%.
Dividend income is generally taxable in the year of declaration, distribution, or payment by the company, whichever is earlier. Final dividends, including deemed dividends, fall under this category.
The Finance Act 2020 also provides a deduction of interest expense from the dividend income. Regarding this, the deduction must not be more than 20% of the dividend income. However, you cannot claim a deduction for any other expenditure, for instance, salary expense or commission.
Provisions for advance tax are applicable if a taxpayer’s total tax liability is equal to or more than Rs. 10,000 in a given FY. Penalty and interest are levied if there is short-payment or non-payment of advance tax liability.
In India, companies distributing, declaring, or paying dividends had to pay DDT at 15%. This came into existence in 1997 by the Finance Act. Only domestic companies were liable to pay tax on dividends in this Act.
According to section 194, TDS is not applicable on dividend income if one pays the amount to GIC, LIC, or any other insurer regarding shares owned by it. In addition, no TDS is deductible in case the shareholder produces form 15G/H and if a shareholder publishes a certificate of nil/lower TDS under section 197.
In 2021, the Finance Act included section 206AB, which lays down the deduction of TDS for dividend income at higher rates in the case of non-filers. According to this section, in the case of non-filers of Income Tax Return (ITR), Tax Deducted at Source (TDS) can be deducted at twice the prevailing rates.
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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