Income Tax on Dividend Income: What Investors Need to Know

What is Dividend Income?

A dividend is a payment that a company gives to its shareholders from its profits. According to tax rules, dividends also include:

1. When a company gives away its assets to shareholders as a profit distribution.
2. Issuing extra shares or giving out debentures (loans) to shareholders from its profits.
3. Distributing the company’s earnings when it closes down.
4. Giving out profits when the company reduces its capital.
5. Providing an advance or loan to shareholders from the company’s profits.



Sources of Dividend

You can receive dividends from the following sources –

• From a domestic company in whose shares you have invested
• From a foreign company in whose shares you have invested
• From equity mutual funds if you have chosen the dividend option
• From debt mutual funds if you have chosen the dividend option

Depending on the source of dividend income, relevant tax incidence would be applicable. So, let’s understand the tax on dividend income implication on the above-mentioned sources of income independently.

Tax on Dividend Income

Before the Assessment Year 2020-21, dividends received from Indian companies were tax-free for shareholders under Section 10(34) of the Act. However, if the dividends exceeded Rs. 10 lakh, they were taxed under Section 115BBDA. The companies paying the dividends were responsible for paying a Dividend Distribution Tax (DDT) under Section 115-O.

With the Finance Act of 2020, the DDT was removed. Now, investors have to pay tax on dividends based on their income tax slab rates, regardless of the dividend amount.

The tax treatment of dividends varies depending on whether you trade securities or invest in them:

1. Trading in Securities: If you trade securities, the dividend income is considered "business income" and taxed accordingly. You can deduct all expenses related to earning that dividend, such as interest on loans and collection fees.
2. Investing in Shares: If you hold shares as an investment, the dividend income is taxed under "income from other sources." You can only deduct up to 20% of the dividend income for interest expenses. Other expenses, like commission or fees paid to a banker to collect the dividend, cannot be deducted.

Tax Rates on Dividend Income

The tax rate on dividends depends on the type of taxpayer and the medium through which the dividend is received. Here's a simple overview:

• Individual Taxpayers: Taxed according to their income tax slab rates.
• Business Taxpayers: Taxed as part of their business income.

Tax Rates on Dividend Income

The type of taxpayer receiving the dividend and the medium on which it is delivered determines the tax rate on dividends. The following table makes this simply understandable:

TDS on Dividend Income

As of April 1, 2020, under Section 194 of the Income Tax Act, Indian companies must deduct tax at source (TDS) on dividends. Here's how it works:

• If you are an Indian resident and receive more than Rs. 5,000 in dividends in a financial year, the company will deduct TDS at 10%. For example, if you receive Rs. 10,000 in dividends, the company will deduct Rs. 1,000 as TDS, and you'll get Rs. 9,000.
• No TDS is deducted on dividends paid to LIC, GIC, or other insurance companies on shares they own.

For non-residents or foreign companies, TDS rules fall under Section 195 and depend on the Double Taxation Avoidance Agreement (DTAA) between India and their country. Non-residents should provide documents like Form 10F, a declaration of beneficial ownership, and a certificate of tax residency to get a lower TDS rate as per the DTAA. Without these documents, TDS will be higher, which can be claimed back when filing your Income Tax Return (ITR).

For example, if Mr. Arun, a resident, received Rs. 10,000 in dividends on May 30, 2023, the company deducted 10% TDS (Rs. 1,000). Mr. Arun received Rs. 9,000. He must report this income in his ITR and will be taxed according to his income tax slab for the financial year 2023-24.

If you're unsure about handling your TDS or ITR, it's a good idea to consult a tax professional. They can help you file correctly, claim eligible deductions, and maximize your tax refund.

Advance Tax and Dividend Income

If a taxpayer's total tax liability for a given financial year is equal to or greater than Rs. 10,000, advance tax provisions will be applicable. If the advance tax liability is not paid in full or in part, interest and a penalty are assessed.

FAQs

Q. Do dividends require tax payment? 

A. A shareholder who receives a dividend from a domestic firm up until Assessment Year 2020–21 will not be required to pay tax on the dividend since it is free from tax under section 10(34) of the Act. However, under Section 115-O, the domestic business is required to pay a Dividend Distribution Tax (DDT) in certain circumstances. However, the Finance Act of 2020 eliminated 

DDT and replaced it with a traditional tax system in which investors pay income taxes. Therefore, the assessee is required to pay dividend income tax.

Q. How often do dividends get paid out? 

A. Dividend payments may be made on a daily, monthly, quarterly, half-yearly, or annual basis, contingent upon the mutual fund firm or business paying the dividend.

Q. Are dividends taxable in India?

A. Yes, dividends are taxable in India because they are considered a form of income.

Q. How much tax on dividend income?

A 10% TDS is payable on the dividend income amount over INR 5,000 during the fiscal year. If the PAN is not submitted, the TDS rate would be 20%. If an individual's income, which includes the dividend income is less than INR 2.5 lakh, it is not taxable.

Q. What is the limit of dividend income tax free?

What amount of dividends are tax-free in India? For the financial year 2021-2022, you can receive up to ₹5,000 in dividend income in India without being taxed. Any dividend income you receive beyond this limit will be taxed according to the applicable tax rates and regulations.

Q. How much TDS on dividend?

A. TDS is deducted at 10% under section 194 if the dividend amount is more than 5000 in a year. TDS is deducted at the time of making payment or credit, whichever is earlier. Payment can be made via cheque, draft, or online. If the payee does not provide a PAN number, TDS has to be deducted at 20%.

Q. How to avoid TDS on dividend income?

A. 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.

Q. What are the tax implications for shareholders receiving dividends?

A. Shareholders are subject to tax on dividend income, which is included in their total income for the year.

The dividend income is taxed at the applicable income tax slab rates, depending on the individual's total income.

Q. What is the rate of deduction for dividends?

A. The dividends received deduction (DRD) is a federal tax deduction in the United States that is given to certain corporations that get dividends from related entities. The amount of the dividend that a company can deduct from its income tax is tied to how much ownership the company has in the dividend-paying company.

Conclusion

Handling tax on dividend income can be tricky, so it's important to get it right. To avoid paying more taxes or facing penalties, it’s best to consult an expert. They can guide you through the process and ensure you meet your tax obligations correctly.

Get a Personal Loan that fits your needs. Apply for loans from Rs 1000 to Rs 15 Lakhs with competitive rates.  

Check Your Eligibility Now  

Find the Perfect Credit Card for your spending habits. Explore top credit cards and maximize your rewards.  

See your matches 

Author- Bhagyashri Bonde  

Bhagyashri is a seasoned personal finance content writer with a keen expertise in credit cards, personal loans, budgeting, saving, and investing. With 4 years of experience in the financial sector, she has a knack for breaking down complex financial concepts into easy-to-understand advice. Her insights on personal finance management and smart saving strategies have helped our countless readers make informed decisions. Bhagyashri’s passion lies in empowering individuals to achieve financial stability and success through practical tips and actionable advice. Follow her for the latest updates on money management and investment opportunities.