Tax on Dividend Income
Dividend income is a popular source of passive earnings for many investors. Whether you hold shares in a multinational corporation or a small startup, understanding the tax implications of your dividend income is crucial. This guide aims to provide a clear and concise overview of how dividends are taxed, helping you navigate the complexities of tax regulations and maximize your returns.
What is Dividend Income?
Dividends are payments made by a corporation to its shareholders, usually in the form of cash or additional shares. These payments represent a portion of the company’s earnings and are typically distributed on a regular basis, such as quarterly or annually.
Types of Dividends
- Qualified Dividends: These are dividends paid by U.S. corporations or qualified foreign corporations that meet certain criteria set by the IRS. Qualified dividends are taxed at the long-term capital gains tax rates, which are generally lower than ordinary income tax rates.
- Ordinary (Non-Qualified) Dividends: These dividends do not meet the criteria for qualified dividends and are taxed at the individual’s regular income tax rate.
Sources of Dividend Income
Dividends can come from various sources, including:
- Domestic Businesses: Dividends from shares you own in domestic companies.
- Foreign Businesses: Dividends from shares you own in foreign companies.
- Equity Mutual Funds: Dividends received if you have selected the dividend option in equity mutual funds.
- Debt Mutual Funds: Dividends received if you have selected the dividend option in debt mutual funds.
The tax implications vary based on the source of the dividend income. Let’s explore the tax impact for each of these sources.
Tax on Dividend Income
Prior to Assessment Year 2020–21
Before the 2020–21 assessment year, dividends received from a domestic company were generally exempt from tax under Section 10(34) of the Income Tax Act, subject to Section 115BBDA. Section 115BBDA mandated that dividends exceeding Rs. 10 lakh would be subject to tax. The domestic company had to pay a Dividend Distribution Tax (DDT) under Section 115-O.
Post Finance Act 2020
The Finance Act of 2020 abolished the DDT. Now, investors are taxed on dividend income under the regular tax regime. Consequently, all dividends received are taxable at the applicable income tax slab rates, irrespective of the amount received.
Tax Implications Based on Dividend Source
- Business Income vs. Investment Income:
- Business Income: If the dividends are received from shares held for trading purposes, they are taxable under “business income.”
- Investment Income: If the dividends are from shares held as investments, they are taxable under “income from other sources.”
- Deductions:
- Business Income: Assessees can deduct expenses incurred to earn the dividend income, including interest on loans and collection charges.
- Investment Income: Assessees can deduct interest expenses up to 20% of the dividend income. Other expenses, like commissions or banker fees, are not deductible.
Taxability of Dividend Income: Old vs. New Provisions
Period | Tax Provisions |
Up to March 31, 2020 (FY 2019–20) | Dividends from Indian companies were exempt because the company paid DDT before distributing dividends. |
Post April 1, 2020 | Dividends are taxable in the hands of investors. Companies and mutual funds no longer pay DDT. Section 115BBDA’s 10% tax on dividends exceeding Rs. 10 lakh is also removed. |
Tax Rates for Dividend Income
The tax rate on dividends depends on the type of taxpayer and the medium through which the dividends are received.
Taxpayer Type | Tax Rate |
Individuals (Resident) | Applicable income tax slab rates |
HUFs and Companies | Applicable income tax slab rates |
Non-Residents | 20% (subject to provisions of tax treaties) |
Income Tax Slabs for Senior and Super Senior Citizens under New Tax Regime
Income Range | Senior Citizens (60-80 years) | Super Senior Citizens (80+ years) |
Up to Rs. 2.5 lakh | Nil | Nil |
Rs. 2.5 lakh – Rs. 5 lakh | 5% | Nil |
Rs. 5 lakh – Rs. 10 lakh | 20% | 20% |
Above Rs. 10 lakh | 30% | 30% |
TDS on Dividend Income
The Finance Act, 2020 introduced a Tax Deducted at Source (TDS) on dividend income distributed by companies and mutual funds starting from April 1, 2020.
TDS Rates
Period | TDS Rate | Applicable Conditions |
From April 1, 2020, onward | 10% | Dividend income exceeds Rs. 5,000 |
May 14, 2020 – March 31, 2021 | 7.5% | COVID-19 relief measure |
The TDS deducted can be claimed as a credit against the taxpayer’s total tax liability when filing the Income Tax Return (ITR).
Example: If Mr. Ravi receives a dividend of Rs. 6,000 from an Indian company on June 15, 2023, TDS of 10% (Rs. 600) will be deducted, and Mr. Ravi will receive Rs. 5,400. The dividend income is taxable at the applicable slab rates for FY 2023-24 (AY 2024-25).
Non-Resident Taxpayers
Taxpayer Type | TDS Rate | Conditions |
Non-Resident | 20% | Subject to Double Taxation Avoidance Agreement (DTAA) benefits with necessary documentation (Form 10F, beneficial ownership declaration, tax residency certificate) |
Without the required documents, a higher TDS rate applies, which can be reclaimed when filing the ITR.
Deduction of Expenses from Dividend Income
The Finance Act, 2020 allows for the deduction of interest expenses incurred to earn dividend income. However, this deduction is capped at 20% of the dividend income received. Other expenses like commissions or salaries are not deductible.
Example: If Mr. Ravi borrowed money to invest in shares and paid Rs. 2,700 in interest during FY 2023-24, he can only deduct Rs. 1,200 as interest expense (20% of Rs. 6,000 dividend income).
Submission of Form 15G/15H
Form | Eligibility | Purpose |
Form 15G | Resident individuals with annual income below the exemption limit | To avoid TDS on dividend income |
Form 15H | Senior citizens with no tax liability | To avoid TDS on dividend income |
These forms should be submitted to the company or mutual fund declaring the dividend. The company/mutual fund will notify the shareholder via registered email and request the submission of these forms to avoid TDS.
Advance Tax on Dividend Income
Advance tax is applicable if the total tax liability is Rs. 10,000 or more in a financial year. Non-payment or short payment of advance tax attracts interest and penalties.
Dividend Received from Foreign Companies
Dividends from foreign companies are taxable under the “income from other sources” category and included in the taxpayer’s total income. They are taxed at the taxpayer’s applicable slab rates. For example, if a taxpayer is in the 30% tax slab, the dividend income will be taxed at 30%, plus cess.
Condition | Deduction | Limitation |
Interest expenses | Deductible | Up to 20% of the gross dividend income |
The foreign company must deduct TDS under Section 194 of the Income Tax Act, 1961. The standard TDS rate is 10% for dividend income exceeding Rs. 5,000 for individuals, increasing to 20% without a PAN.
Relief from Double Taxation
Dividends received from a foreign company are often subject to tax both in India and in the country where the foreign company is based. However, taxpayers can seek relief to avoid being taxed twice on the same income.
Double Taxation Relief Methods
Method | Description |
Double Taxation Avoidance Agreement (DTAA) | If India has a DTAA with the foreign country, the taxpayer can claim relief as per the agreement. |
Section 91 | In the absence of a DTAA, taxpayers can claim relief under Section 91 of the Income Tax Act. |
Note: These provisions ensure that taxpayers do not pay tax on the same income more than once, thereby avoiding double taxation.
Managing taxes on dividend income can be complex, so it is crucial to have accurate information. Consulting with a tax expert is advisable to ensure compliance and to avoid overpaying taxes or incurring penalties for missed liabilities. A tax professional can provide guidance and help navigate the intricacies of dividend taxation effectively.
FAQS
- What are the different sources of dividend income?
Dividend income can come from various sources, including:
- Domestic businesses through shares you own.
- Foreign businesses through shares you own.
- Equity mutual funds if you have opted for the dividend option.
- Debt mutual funds if you have opted for the dividend option.
- How are dividends taxed after the Finance Act, 2020?
Before the Finance Act, 2020, dividends from domestic companies were generally exempt from tax as the company paid the Dividend Distribution Tax (DDT). However, from April 1, 2020, DDT was abolished, and now all dividend income is taxed at the recipient’s applicable income tax slab rates.
- What is the TDS rate on dividend income, and how does it apply?
The TDS rate on dividend income is 10% for dividends exceeding Rs. 5,000 from a company or mutual fund. As a COVID-19 relief measure, the TDS rate was reduced to 7.5% from May 14, 2020, to March 31, 2021. Non-resident individuals are subject to a 20% TDS rate, subject to the Double Taxation Avoidance Agreement (DTAA) benefits.
- Can I claim deductions on expenses incurred to earn dividend income?
Yes, under the Finance Act, 2020, you can claim a deduction for interest expenses incurred to earn dividend income, but this deduction is limited to 20% of the dividend income. Other expenses, such as commissions or salary expenses, are not deductible.
- What relief is available for avoiding double taxation on foreign dividends?
To avoid double taxation on dividends received from foreign companies, you can seek relief under:
- DTAA: If there is a DTAA between India and the foreign country, claim relief as per the agreement.
- Section 91: In the absence of a DTAA, claim relief under Section 91 of the Income Tax Act. These provisions ensure you are not taxed on the same income in both countries.
