Tax on Dividend Income in India – How is Your Dividend Taxed?

Fireworks start lighting up in every investor’s mind when their companies start declaring dividends. But novice investors often forget that there is a tax on dividend income in India as well. In order to keep you prepared and avoid any last-minute jolts when you receive your dividend in this article, we cover how a tax on dividends is applicable in India. Keep Reading to find out!

How is Tax on Dividend Applicable in India? 

According to rules of taxation applicable prior to 31 March 2020, any dividend received by an individual from an Indian company was exempt. This was because the company which declares a dividend has already paid a dividend distribution tax (DDT) before making payment.

However the Finance Act, 2020 abolished the dividend distribution tax. According to this any dividend received on or after April 1st, 2020 will be taxable in the hands of the shareholder. In addition to this the existing 10% tax on dividends over Rs. 10 lakhs received by Resident individuals, HUFs is also abolished. 

What are the Dividend Tax Rates in India? 

According to the new rules of taxation, any dividend income in excess of Rs. 5000 from a company or mutual fund will be taxed at 10%. This tax is deductible at source hence the shareholder receiving dividends in excess of Rs. 5,000 will receive dividends after they are taxed. This TDS is applicable for dividends received from both mutual funds and companies. 

Eg. Mr. A holds 10,000 shares of XYZ ltd which has released a dividend of Rs. 1 per share. But this does not mean that Mr. A will receive Rs. 10,000. A will receive Rs. 9000 after TDS being already deducted.

What are the Deductions Available to Individuals?

According to the Finance Act, 2020 any interest expense incurred against the dividend can be deducted against the tax payable. However, this deduction should not exceed 20% of the dividend income received. The Act however does not allow any other expenditure to be claimed as a dividend.

Eg. Let us take the above example once again but here Mr. A had borrowed Rs. 20,000 at 5% interest to invest in XYZ Ltd. In such a situation he can use the Rs. 1000 paid as interest as a deduction. By doing this he can avail the full Rs. 10,000 benefit from the dividend.

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What to do if Your Income is Already Less Than the Taxable Limit? 

When it comes to dividends there are provisions in place if your income is less than the taxable limit. In such a situation as the individual’s income is already not covered as taxable under the tax slabs he can make use of form 15G.

Here the individual had to submit form 15G to the company or the mutual fund paying the dividend. The company or the mutual fund will pay out the dividend to the individual without TDS.

What to Do if You Receive Dividends from Shares of a Foreign Company? 

Thanks to various brokerages increasing the accessibility to foreign markets one can easily invest in foreign stocks. But what happens to the Indian resident individual when a foreign company declares dividends.

Here too the dividend is taxable and is taxed under income from other sources. This means that the dividend will be added to the total income of the individual and be taxed at the respective tax slab rates applicable to the individual. 

How is Tax on Dividends Applicable to NRI? 

When it comes to Non-Resident Indians a TDS of 20% is deducted. But this is subject to the Double Taxation Avoidance Agreement (DTAA). In such a situation if the Indian government has a tax treaty with the other country the individual is residing in, it can be used to avoid taxing their income twice. The first being at source and the second being the country of residence.

In this case, NRI’s have to submit the Form 10F, declaration of beneficial ownership, certificate of tax residency among others to avoid their income being taxed twice. 

In Closing 

Dividends are times of celebration! And now that you know exactly how you will be taxed there will be no reason to stop these at you will be well prepared for the taxes applicable.

In addition understanding, the tax rates applicable to individuals also help you better analyze the dividends given out by companies and the companies themselves. Let us know what you think about this article on tax on dividend income in India in the comments below. Happy Investing!