Taxation Of Dividend Income: Old vs New Provision, Deductions, And More
Are you confused about whether you need to pay tax on dividend income or not?
Well, the Finance Act of 2020 states that dividend income is taxable directly to the shareholders and individual investors. This shifted the tax payment burden from the company to its shareholders.
The following sections mention the old and new taxation of dividend income and its implications. You will also know about deductions permissible from dividend income and TDS on dividend income.
So, keep reading!
Taxation of Dividend Income – Old vs New Provisions
Until 2020-21, dividend income in a domestic company was exempted in a shareholder’s hands under section 10 (34) of the Income Tax Act. As a result, in that case, a company had to pay DDT (Dividend Distribution Tax) under section 115-O of this Act.
Since 2020, the Finance Act has made all previous provisions ineffective. Meaning, that dividend obtained on or after April 1 2020 is taxable directly to the investors or shareholders.
Because of this amendment, section 115BBDA is also of no relevance. This section mentioned a tax rate on dividend receipts of over Rs. 10 lakh at 10% in the shareholders’ hands. From 2020-21, the entire dividend income amount is taxable, eliminating the threshold limit of Rs. 10 lakh.
Permissible Deductions from Dividend Income
The Finance Act of 2020 institutes TDS on dividend income by mutual funds and companies on and after April 1 2020.
Regarding this, the basic TDS rate on dividend income is 10%, which is paid for dividend income more than Rs. 5,000 from a mutual fund or company. However, due to the pandemic, the government has lowered the TDS rate. The current rate is 7.5%, effective from May 14 2020 to March 31 2021.
Furthermore, the deductible tax can be seen as a taxpayer’s credit from overall tax liability when he/she filed Income Tax Return(ITR).
For example:
Suppose Mr Atul got a dividend of Rs. 7,000 from a domestic company on June 11 2020. As his dividend income is more than Rs. 5,000, the said company will cut TDS at 7.5%, which will be Rs. 525. Upon calculations, Mr Atul will receive a revised sum of Rs. 6,475.
You must remember that the taxation of dividend income follows the slab rates for the current fiscal year.
Also Read – Section 269SS of Income Tax Act: Provisions, Exemptions, and Penalty
So, what about NRIs?
For NRIs, the TDS deduction rate is 20% based on the double taxation avoidance agreement (DTAA), if any. To obtain the benefit of a lower deduction rate, NRIs need to submit several documents, including Form 10F, certificate of tax residency, declaration of beneficial ownership, and more. If you fail to procure these documents, the TDS rate will be higher, which you can claim at the Income Tax Return (ITR) filing.
Form 15G or 15H Submission
Indian residents receiving dividends with an annual income less than the exemption limit can present Form 15G to the mutual fund or company paying that dividend.
In the same way, senior citizens can present Form 15H to the firm paying the dividend. This is applicable only if their gauged tax payment is nil.
Upon this, the mutual fund or company informs the investor or shareholder regarding the declaration of dividend on their mail ID.
Also Read – How To Pay Income Tax Online?
Dividend Income from Foreign Firms
Any dividend that one receives from any international company is also taxable. Taxation of dividend income from foreign companies is charged under ‘income from other sources.’
Dividends accepted from an international company are added to a taxpayer’s total income and are subject to tax concerning the applicable rates.
For instance, suppose a taxpayer falls under a tax slab rate of 30%. Then, any dividend from a foreign company will have to pay a tax at 30%.
More so, regarding foreign dividends, an investor is eligible to claim a deduction just for interest expense, which features a restriction of 20% on the gross dividend income. The company that declares the dividend will also have to deduct TDS under Income Tax Act’s section 194. According to this section, a dividend income exceeding Rs. 5,000 will attract a tax deduction of 10%. If the applicant fails to submit a PAN, this rate will increase to 20%.
Did you know that a taxpayer can also claim double taxation relief?
If a foreign company pays tax twice, meaning, in both India and the foreign country, then a taxpayer can get double taxation relief. This would mean that the taxpayer will get relief from paying tax on the same income two times.
Final Word
Taxation of dividend income is an essential aspect of the Finance Act that every taxpayer should be aware of. The above sections will be of assistance to any shareholder or investor in a domestic or international company.
Frequently Asked Questions
Ans: 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.
Ans: 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.
Ans: 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.
Ans: 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.
Ans: 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.
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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