As a taxpayer, you may be unsure about how to treat dividend income while filing your tax return. Do you need to pay tax on dividend income?
Finance Act 2020 shifted the taxability on dividend income from the hands of the dividend declaring company to the individual investors.
In this article, we will discuss the old and the new tax provisions related to ‘dividend income’ and its tax implications.
Dividend Received From an Indian Company
After the abolition of the dividend distribution tax (DDT), the taxability of dividend income is now in the hands of the investors.
Old V/s New provision for taxability of dividend income
- The dividend received from an Indian company was exempt until 31 March 2020 (FY 2019-20). That was because the company declaring such a dividend already paid dividend distribution tax (DDT) before making payment.
- However, the Finance Act, 2020 changed the method of dividend taxation. Henceforth, all dividend received on or after 1 April 2020 is taxable in the hands of the investor/shareholder
- The DDT liability on companies and mutual funds stand withdrawn. Similarly, the tax of 10% on dividend receipts of resident individuals, HUF and firms in excess of Rs 10 lakh (Section 115BBDA) also stands withdrawn.
TDS on dividend income
- The Finance Act, 2020 also imposes a TDS on dividend distribution by companies and mutual funds on or after 1 April 2020.
- The normal rate of TDS is 10% on dividend income paid in excess of Rs 5,000 from a company or mutual fund. However, as a COVID-19 relief measure, the government reduced the TDS rate to 7.5% for distribution from 14 May 2020 until 31 March 2021.
- The tax deducted will be available as a credit from the total tax liability of the taxpayer while filing ITR.
- For instance, Mr Ravi received a dividend amounting to Rs 6,000 from an Indian company on 15 June 2023. Since his dividend income exceeds Rs 5,000, the company will deduct a TDS @10% on the dividend income which is Rs 600. Mr Ravi will receive the balance amount of Rs 5,400. Further, the dividend income is the taxable income of Mr Ravi taxed at the slab rates applicable for FY 2023-24 (AY 2024-25).
- For non-resident persons, TDS is required to be deducted at the rate of 20% subject to the DTAA (double taxation avoidance agreement), if any. To avail of the benefit of lower deduction due to the beneficial treaty rate with the country of residence, the non-resident has to submit documentary proof such as Form 10F, declaration of beneficial ownership, certificate of tax residency etc. In the absence of submission of these documents, higher TDS would be deducted, which can be claimed at the time of filing ITR.
Deduction of expenses from dividend income
The Finance Act, 2020 also provides for deduction of interest expense incurred against the dividend.
The deduction should not exceed 20% of the dividend income received. However, you are not entitled to claim a deduction for any other expenditure like commission or salary expense incurred for earning the dividend income.
In the above example, if Mr. Ravi borrowed money to invest in equity shares and paid interest of Rs 2,700 during FY 2023-24, only Rs 1,200 is allowable as an interest deduction.
Submission of Form 15G/15H:
A resident individual receiving dividends whose estimated annual income is below the exemption limit can submit form 15G to the company or mutual fund paying the dividend.
Similarly, a senior citizen whose estimated annual tax payable is nil can submit Form 15H to the company paying the dividend.
The company or mutual fund informs the shareholder about the dividend declaration on their registered mail id and requires submission of form 15G or form 15H to claim dividend income without TDS.
Advance Tax on Dividend Income
Advance tax provisions apply if the total tax liability of the taxpayer is equal to or more than Rs.10,000 in a particular financial year. Interest and penalty is levied in case of non-payment or short payment of the advance tax liability.
Dividend Received From Foreign Company
Dividend received from a foreign company is taxable. It will be charged to tax under the head “income from other sources.”
Dividends received from a foreign company will be included in the total income of the taxpayer and will be charged to tax at the rates applicable to the taxpayer.
For instance, if the taxpayer comes in at the 30% tax slab rate, then such dividend will also be taxable at 30% along with cess.
Even in the case of foreign dividend, the investor can claim deduction only for the interest expense restricted to 20% of the gross dividend income.
However, the company declaring the dividend will have to deduct TDS under section 194 of the Income-tax Act, 1961. As per this section, 10% TDS is applicable for dividend income above Rs.5000 for an individual; this rate will be increased to 20% in the absence of PAN submission by the recipient of dividend income.
Relief from Double Taxation
Dividend received from a foreign company gets taxed both in India and in the home country of the foreign company.
However, if the tax on an international company’s dividend has been paid twice (i.e. paid in both the nations), then the taxpayer can claim double taxation relief.
The relief claimed can be either as per the provisions of double taxation avoidance agreement entered into by the Government of India, with the country to which the foreign company belongs, or he can claim relief as per Section 91 (in case no such agreement exists). This means that the taxpayer doesn’t have to pay tax on the same income twice.
