Dividend Tax: Tax on Dividend Income

What is Dividend Income?

A dividend usually refers to the distribution of profits by a company to its shareholders. If you are someone who invests in stocks, ULIPs, or mutual funds, you will receive a dividend. However, in view of Section 2(22) of the Income-tax Act, the dividend shall also include the following:

• Distribution of accumulated profits to shareholders, entailing release of the company's assets;
• Distribution of debentures or deposit certificates to shareholders out of the accumulated profits of the company, and issue of bonus shares to preference shareholders out of the accumulated profits;
• Distribution made to shareholders of the company on its liquidation out of accumulated profits;
• Distribution to shareholders out of accumulated profits on the reduction of capital by the company;
• Loan or advance made by a closely held company to its shareholder out of accumulated profits.

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 on dividend income implications on the above-mentioned sources of income independently.

Tax on Dividend Income

Previously, i.e, up to Assessment Year 2020-21, if a shareholder gets a dividend from a domestic company then he shall not be liable to pay any tax on such dividend as it is exempt from tax under section 10(34) of the Act subject to Section 115BBDA which provides for taxability of dividend more than Rs. 10 lakh. However, in such cases, the domestic company is liable to pay a Dividend Distribution Tax (DDT) under section 115-O.

In India, an individual can receive dividend income upto Rs.5,000 without being subject to tax on it. Any dividend income received beyond this is subject to tax on dividend income at the applicable slab rates.

The Finance Act, 2020 has abolished the DDT and moved to the classical system of taxation wherein dividends are taxed in the hands of the investors. So now, dividend income will become taxable in the hands of taxpayers irrespective of the amount received at applicable income tax slab rates.

Taxability of dividend will depend upon whether the dividend receiver deals in securities either as a trader or as an investor. The income earned by the person from the trading activities is taxable under the head business income. Thus, if shares are held for trading purposes then the dividend income shall be taxable under the head income from business or profession.

Whereas, if shares are held as an investment then income arising in the nature of dividend shall be taxable under the head of income from other sources.

Where the dividend is assessable to tax as business income, the assessee can claim the deductions of all those expenditures that have been incurred to earn that dividend income, such as collection charges, interest on the loan, etc. Whereas if the dividend is taxable under the head of income from other sources, the assessee can claim a deduction of only interest expenditure which has been incurred to earn that dividend income to the extent of 20% of total dividend income. No deduction shall be allowed for any other expenses, including commission or remuneration, paid to a banker or any other person for the purpose of realizing such dividend.

Tax Rates on Dividend Income

Tax Rates on dividend income depends upon the type of assessee receiving the dividend and the instrument on which the dividend is distributed. This can be easily understood via the following table:-

When to Tax Dividend Income?

Section 8 of the Act provides that the final dividend, including the deemed dividend, shall be taxable in the year in which it is declared, distributed, or paid by the company, whichever is earlier. Whereas an interim dividend is taxable in the previous year in which the amount of such dividend is unconditionally made available by the company to the shareholder. In other words, an interim dividend is chargeable to tax on a receipt basis.

TDS on Dividend Income

As per Section 194, TDS shall be applicable to dividends distributed, declared, or paid on or after 01-04-2020; an Indian company shall deduct tax at the rate of 10% from dividend distributed to the resident shareholders if the aggregate amount of dividend distributed or paid during the financial year to a shareholder exceeds Rs.10,000. Earlier, upto FY 2024-25, this limit was Rs. 5,000. However, no tax shall be required to be deducted from the dividend paid or payable to Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC), or any other insurer in respect of any shares owned by it or in which it has full beneficial interest.

Let’s understand this with the help of an example -

On May 30 2023, Mr. Arun received a dividend of Rs 10,000 from an Indian company. The company deducted a TDS of 10% on the dividend, amounting to Rs 1000, as his dividend income exceeded Rs 5,000. Mr. Arun received the remaining Rs 9000. The tax on dividend income will be calculated on applicable slab rates for FY 23-24.

For non-resident individuals, TDS should be deducted at 20%, subject to any applicable double taxation avoidance agreements (DTAAs). Non-residents must provide documents like Form 10F, a declaration of beneficial ownership, and a certificate of tax residency to qualify for the reduced TDS rate under the treaty with their country of residence. Without these documents, higher TDS will be deducted, which can be claimed when filing an ITR.

It is mandatory to report your dividend income in ITR. The ITR filing for FY 2024-25 is about to begin, and understanding the TDS provisions and filing an accurate ITR can be difficult. Seeking professional help can not only help in accurate filing but also make sure you claim all potential deductions while maximizing your tax refund. File ITR with experts now!

Deduction of Expenses from Dividend Income

As per the Finance Act 2020, the interest expense incurred against the dividend income is deductible from the income. The deduction should not exceed 20% of the dividend income received. However, apart from this, you cannot claim a deduction for any commission or salary expense incurred for earning the dividend.

Submitting Form 15G/15H

A resident individual receiving dividend income and whose estimated annual income is below the basic exemption limit can submit Form 15G to the company paying the dividend. Form 15G is a form of declaration that your annual income falls within the exempted slab and therefore, your TDS should not be deducted.

Similarly, a senior citizen whose annual income is below the basic exemption limit and the estimated tax liability is nil can submit Form 15H to the company paying the dividend.

Advance Tax and Dividend Income

If an individual’s total tax liability for the given financial year is more than or equal to Rs.10,000, then the advance tax provisions will be applicable. If the advance tax liability is not paid fully or partially, it might attract interest and penalties.

If the shortfall in the advance tax installment or the failure to pay the same on time is on account of dividend income, no interest under section 234C shall be charged, provided the assessee has paid full tax in subsequent advance tax installments. However, this benefit shall not be available in respect of the deemed dividend as referred to in Section 2(22)(e).

Dividend from a Foreign Company

A foreign corporation's dividend is taxable under "income from other sources." These dividends are included in the taxpayer's total income and taxed at their applicable rates. For example, if the taxpayer falls under the 30% tax slab, the dividend will be taxed at 30% plus cess. The investor can deduct interest expenses up to 20% of the gross dividend income, even for foreign dividends.

Under Section 194 of the Income-tax Act of 1961, the firm declaring the dividend must deduct TDS. If the dividend income exceeds Rs. 10,000 for an individual, TDS is 10%. If the beneficiary does not submit a PAN, the TDS rate increases to 20%.

Double Taxation Relief

Though any dividend received from a 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 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 Governments of other countries. If the agreement is not available, you can also claim relief under Section 91 of the Income Tax Act and avoid paying double taxes on the same income.

As per most of the DTAAs India has entered into with foreign countries, the dividend is taxable in the source country in the hands of the beneficial owner of shares at a rate ranging from 5% to 15% of the gross amount of the dividends. In DTAA with countries like Canada, Denmark, and Singapore, the dividend tax rate is further reduced where the dividend is payable to a company that holds a specific percentage (generally 25%) of shares of the company paying the dividend. However, no minimum time limit has been prescribed in these DTAAs for which such shareholding should be maintained by the recipient company. Therefore, MNCs were often found misusing the provisions by increasing their shareholding in the company, declaring immediately before the declaration of the dividend, and offloading the same after getting the dividend.

Inter-Corporate Dividend

From AY 2020-21, the taxability of dividends has been shifted from companies to shareholders. Therefore, the Government has introduced a new section 80M under the Act to remove the cascading effect where a domestic company receives a dividend from another domestic company.

However, nothing has been prescribed where a domestic company receives a dividend from a foreign company and further distributes the same to its shareholders. The taxability in such cases shall be as under:

• Domestic co. receives a dividend from another domestic co.
  The provisions of section 80M remove the cascading effect by providing that intercorporate dividend shall be reduced from the total income of the company receiving the dividend if the same is further distributed to shareholders one month prior to the due date of filing of return.
• Domestic co. receives a dividend from a foreign co.
  Dividend received by a domestic company from a foreign company, in which such domestic company has 26% or more equity shareholding, is taxable at a rate of 15% plus Surcharge and Health and Education Cess under Section 115BBD. Such tax shall be computed on a gross basis without allowing a deduction for any expenditure.
  Dividend received by a domestic company from a foreign company, in which equity shareholding of such domestic company is less than 26%, is taxable at the normal tax rate. The domestic company can claim a deduction for any expense incurred by it for the purposes of earning such dividend income.

Have you received a dividend in the current FY? If yes, then make sure you report it in your ITR. And if you are someone who finds taxes complicated, don’t worry! Our experts are here to help you every step of the way. From tax planning to tax filing and post-filing notice assistance, our experts provide end-to-end tax solutions for your needs. Hire an expert from Tax2win now and enjoy a seamless ITR-filing journey. Book online CA now!