No Dividend Distribution Tax (DDT) to be paid by Companies from FY 2020-21. Hence the dividend income will become taxable in the hands of taxpayers irrespective of the amount received at applicable income tax slab rates.
Source 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 implication on the above-mentioned sources of income independently –
Dividend received from a domestic company
If you receive dividends on the shares of a domestic company, the amount of dividend received would be tax-free in your hands under Section 10(34) of the Income Tax Act. The reason the dividend income would be tax-free is because the company distributing the dividend has already paid a Dividend Distribution Tax (DDT) on before distributing the dividend. The dividend income has been, therefore, taxed earlier and is not subject to another tax in the hands of the investor. The exemption on dividend income under Section 10(34) of the Income Tax Act can be claimed by individual investors and HUFs.
However, there is a corollary of the above exemption. If the total income from dividends exceeds INR 10 lakhs in a financial year, you would have to pay a tax under Section 115BBDA of the Income Tax Act. A tax of 10% would be levied on the income which exceeds INR 10 lakhs.
Example So, suppose you receive a dividend income from two domestic companies amounting to INR 3 lakhs and INR 5 lakhs each. In both the cases you would not have to pay any tax on the dividend income. Now, if you receive dividend from another domestic company and the amount of dividend is INR 4 lakhs, the aggregate dividend earned in the financial year would amount to INR 12 lakhs. Since the tax-free limit of INR 10 lakhs is crossed, you would have to pay a tax of 10% on the excess which is INR 2 lakhs. In this case, therefore, your tax liability on dividend income would be INR 20,000.
Dividend received from a foreign company
If you have invested in an international company, the dividends paid by that company would be considered as a taxable income under Section 115BBD of the Income Tax Act. The dividend income would be listed under ‘income from other sources’ and added to your total income. Thereafter, it would be taxed at your income tax slab rates.
Example If you have a gross total income of INR 10 lakhs and receive INR 1 lakh as dividends from a foreign company, your gross total income would become INR 11 lakhs. Thereafter, your tax liability would be calculated as follows –
|On the first INR 2.5 lakhs||Nil|
|On the income between INR 2.5 lakhs and INR 5 lakhs||5% of INR 2.5 lakhs = INR 12,500|
|On the income between INR 5 lakhs and INR 10 lakhs||20% of INR 5 lakhs = INR 1 lakh|
|On the remaining INR 1 lakh||30% of INR 1 lakh = INR 30,000|
|Total tax payable||INR 142,500|
Double Taxation Relief on dividends received from foreign companies
Though dividend received from foreign company is taxable in India, if it has also been taxed in the country where the foreign company operates, there is a case of double taxation. In these cases you can claim a relief on double taxation. You can claim the relief as per the provisions of the Double Tax Avoidance Agreement (DTAA) which the Indian Government has with the Government of other countries. If the agreement is not available, you can also claim a relief under Section 91 of the Income Tax Act and avoid paying double taxes on the same income.
Dividend received from equity or debt mutual funds
Dividends received from both equity and debt mutual funds would be completely tax-free in your hands under Section 10(35) of the Income Tax Act. This is because both equity and debt funds would have paid a Dividend Distribution Tax on the dividends which have been distributed. The dividend that you have received is, therefore, already taxed and would not be taxed further. Furthermore, unlike in case of dividends from domestic companies, there is no upper limit on the tax-free dividend. Any amount of dividend that you would receive would be totally exempted from tax.
Dividend Distribution Tax
As mentioned earlier, a Dividend Distribution Tax is deducted by domestic companies and dividend mutual funds before the dividend is paid. The rate of this Dividend Distribution Tax, however, differs. The applicable rates are as follows –
|Entity offering the dividend||Rate of Dividend Distribution Tax (including surcharge and cess)|
|Domestic company||17.304% as per the provisions of Section 115-O of the Income Tax Act|
|Equity mutual funds||11.648% as per the provisions of Section 115-R of the Income Tax Act|
|Debt mutual funds||28.84% as per the provisions of Section 115-R of the Income Tax Act|
Foreign companies are not required to pay the Dividend Distribution Tax and that is why the dividend paid by them is taxed at your income tax slab rates.
Recording dividend income in the income tax return
Whenever you receive a dividend income in a financial year the same should be recorded in your income tax return whether the dividend is taxable or not. The dividend income should be mentioned under the head ‘income from other sources’. Once it is recorded, its taxability would be determined based on the above-mentioned rules.
So, now you know how dividend income is taxed in your hands. The next time you receive any dividend income, ascertain its source. If it is paid by a domestic company or a mutual fund scheme, the income received would be tax-free. If, however, a foreign company pays the dividend the same would be taxed. Know the tax implications properly so that you can file your returns correctly.
Frequently Asked Questions
Q- When is dividend paid?
Dividend is paid when the stock in which you invested performs well and its value rises. As the value rises, the company which issued the stock makes a profit. A part of this profit is distributed among investors in the form of dividends.
Q- What is the frequency of dividend payment?
Dividend can be paid daily, monthly, quarterly, half-yearly or annually depending on the company or the mutual fund house paying the dividend.
Q- Do I need to pay tax on dividends?
Yes, if your dividend income exceeds INR 10 lakhs you need to pay tax on them
Q- What is the tax rate applicable on dividend income?
The tax rate which is levied on dividend income is 10%. This rate is applicable only if the dividend income exceeds INR 10 lakhs
Q- Do I need to record dividend in my tax return even if it is tax-free?
Yes, dividend income should be mentioned in the tax returns even if it is completely tax-free.
Q- Is there any way to avoid paying income tax on dividend income?
If the aggregate dividend income that you receive from a company is more than INR 10 lakhs you cannot avoid paying income tax on such dividend income.
Q- Why are dividends taxed?
Taxation of dividend income is governed by Income Tax rules. As per the rules, if you receive dividends from foreign companies, such dividend would be taxed. Moreover, dividends from Indian companies would also be taxed if they exceed INR 10 lakhs
Q- Do shareholders also pay tax on dividends?
Yes, shareholders would also be taxed on dividends if the dividend income is more than INR 10 lakhs
Q- Are dividends considered income?
Yes, dividends are considered an income under the Income Tax Act
Q- What DDT means?
DDT or Dividend Distribution Tax is required to be paid by the companies on the dividends they issue. As per Budget 2020 speech, no Dividend Distribution Tax (DDT) shall be paid by the Companies from FY 2020-21.
Q- What is the DDT full form in tax?
DDT means the Dividend Distribution Tax which is required to be paid by the companies on dividend distribution.
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