Taxation on Dividends in India: Everything You Need to Know

Dividends serve as a common source of income for investors, but they are also subject to taxation in India. The Finance Act 2020 introduced significant changes in how dividends are taxed, transferring the tax liability from companies to the individual shareholders. Understanding the current provisions is crucial for proper tax planning and compliance. This article breaks down the taxation framework for dividends in India.

What is Dividend Income?

A dividend is a portion of a company’s profit distributed to its shareholders as a reward for their investment. While dividends provide a steady income stream, they are taxable under the Income Tax Act. The Finance Act 2020 abolished the Dividend Distribution Tax (DDT), making dividend income taxable in the hands of investors.

Key Changes in Dividend Taxation: Old vs New Provisions

1. Before April 1, 2020:
   • Companies paid a Dividend Distribution Tax (DDT) before distributing dividends to shareholders.
   • Shareholders received dividends tax-free.
   • An additional 10% tax was imposed on individuals if dividend income exceeded ₹10 lakh (Section 115BBDA).
2. After April 1, 2020:
   • DDT was abolished.
   • The tax liability shifted to shareholders, making all dividend income taxable in their hands.
   • Section 115BBDA provisions were withdrawn.

Tax Deduction at Source (TDS) on Dividend Income

1. TDS Applicability:
   • TDS is deducted on dividend payments of ₹5,000 or more at a rate of 10%.
   • For dividends distributed from May 14, 2020, to March 31, 2021, the TDS rate was temporarily reduced to 7.5% as a COVID-19 relief measure.
2. Non-Resident Taxpayers:
   • TDS is deducted at 20%, subject to relief under the Double Taxation Avoidance Agreement (DTAA).
   • Documentation like Form 10F and a Tax Residency Certificate is required to avail treaty benefits.
3. Higher TDS for Non-PAN Holders:
   • If shareholders fail to provide their PAN, TDS is deducted at 20%.

Deduction of Expenses Against Dividend Income

Investors can claim certain expenses incurred to earn dividend income, such as:

• Interest Expense: Deduction is allowed up to 20% of the gross dividend income.
• Other Expenses: Administrative costs like collection charges, but not personal expenses, are deductible.

Taxability of Dividends from Foreign Companies

1. Tax Rate:
   • Dividends from foreign companies are treated as “Income from Other Sources” and taxed at applicable slab rates.
   • TDS provisions under DTAA (Double Taxation Avoidance Agreement () may apply, offering reduced tax rates.
2. Expense Deduction:
   • Similar to domestic dividends, interest expenses up to 20% of gross dividend income are deductible.
3. Double Taxation Relief:
   • Taxpayers can claim relief for taxes paid in the source country under DTAA.

Advance Tax Liability on Dividend Income

Dividend income must be accounted for when calculating advance tax liability. The following guidelines apply:

• Advance tax must be paid in installments as per the total expected income.
• If the tax liability arises solely due to unexpected dividend payments, advance tax can be paid in subsequent installments without penalties.

When Are Dividends Taxed?

• Dividends are taxable in the financial year they are declared, distributed, or paid, whichever is earlier.
• Taxation applies to both interim and final dividends.

Relief for Certain Shareholders

1. Exemptions from TDS:
   • No TDS is deducted if the shareholder is:
     • A Life Insurance Corporation (LIC) or General Insurance Corporation.
     • An insurance company or mutual fund.
2. Form 15G/15H:
   • Shareholders with income below the taxable limit can submit Form 15G/15H to avoid TDS.

Practical Example of Taxation on Dividend Income

Let’s assume Mr. Sharma received a dividend of ₹8,000 from an Indian company:

• The company deducts TDS of 10%, i.e., ₹800.
• Mr. Sharma receives ₹7,200.
• He can claim the ₹800 TDS as a credit when filing his Income Tax Return (ITR).
• The total dividend of ₹8,000 will be added to his gross income and taxed as per his income slab.

Key Takeaways

• Dividend income is taxable in the hands of shareholders as per their income slab rates.
• TDS is deducted on dividends exceeding ₹5,000 at 10% (or 20% for non-PAN holders).
• Expenses incurred to earn dividend income are deductible up to 20% of the gross dividend.
• Relief from double taxation is available under DTAA for foreign dividends.

Conclusion

The shift in dividend taxation has streamlined the tax process but increased individual liability. Investors must consider these changes when planning their investments and tax obligations. Keeping track of TDS deductions, advance tax payments, and applicable deductions can help maximize post-tax returns. For personalized advice, consulting with a tax professional is recommended.

Disclaimer: This article is for informational purposes only and should not be construed as financial or legal advice. It is essential to consult with qualified professionals for personalized guidance on tax matters.