The dividend is the amount received by the investor falling in either Hindu Joint Family (HUF) or the individual category based on the shares in the company. Typically, it means how a firm distributes its profits to its shareholders. As a shareholder, you will receive dividends whenever the company makes profits. Recently, the tax on dividend incomes went through modifications. Learn about tax on dividend income, dividend tax rates, etc in the article.
What is Dividend?
Dividend refers to the profit distribution of a company to its shareholders. The dividends are issued in different forms such as stocks, cash, bonds etc. The board of directors of any company decides the company’s dividends. Though it is not mandatory for any organization to give out dividends to the shareholders.
Dividends are usually paid to shareholders after the company pay the creditors. The company can also skip paying dividends in case they fall short of cash and needs reinvestment. Tax on dividend income is applicable as per the regulations set by the government.
The Source of Dividends
There are various sources from where you can get dividend income. Here are the sources from where you can get dividends-
- Domestic companies where you have invested in shares
- Foreign companies where you have invested in shares
- Equity mutual funds (if you have opted for the dividend option)
- Debt funds (if you have opted for the dividend option)
Please note that the taxes will be applicable wherever relevant, depending on the sources you are receiving the dividends from. Let’s know more about tax on dividend income in depth for better understanding.
- Tax on dividend income is different depending on whether they are eligible or not
- For the residents, TDS will be deducted at 10% on the dividend amount
- For the non-residents, TDS will be deducted at 20% along with surcharge and cess
- If the dividend income does not increase more than INR 5, 000, no TDS will be applicable (for residents)
- On gross dividend income, a maximum deduction of 20% will be applicable
- Tax on dividends paid by real estate investment trusts (REITs), for example, are taxed at the regular income rate
Current Updates in Tax on Dividend Income
As per the previous fiscal year 2020-21, in case a shareholder receives a dividend from any domestic company then they won’t be liable to pay any tax on the dividend. This exemption was provided under the Income Tax Section 10(34) Subject 114BBDA. The section provided relief from taxes if the dividend is under Rs. 10 Lakh. Though the company was liable to pay dividend distribution tax.
However, the current applicable act, the Financial Act 2020 has removed the dividend distribution tax and made changes. As per the current tax on dividend income rule, the amount will be taxed from the investors directly.
Taxation on Dividend Income
Tax on dividend income depends upon whether the receiver is a securities investor or trader. Then the income generated from any trading activities will have taxes levied on them under the business income section.
- If the shares are for trading, they will be taxable under the income from business or profession heading
- If the shares are kept as an investment, then income from dividends will be taxable under the income from other sources heading
Please note that if your dividend falls in the business income category, you can claim a deduction on all the expenses you have made to earn that dividend. This includes interest rates on loans, collection fees and more.
Whereas if the dividend falls under the income from other sources category, you can claim a deduction for the interest expense you have paid to earn that dividend. The bar for deduction is set up to 20% of the total income.
Tax Rates on Dividend Income
The dividend tax rate is set by the government.
|Income Tax Section||Particular||Assessee||Dividend tax rate|
|115AC||Dividend on GDR of Public Sector Company or Indian Company purchased in any foreign currency||NRI||10%|
|115AD||Income from the Securities other than units in Section 115AB||FPI||20%|
|115AD||Income from the Securities other than units in Section 115AB||Offshore banking unit’s investment division||10%|
|115E||Dividend received from Indian company’s share in any foreign currency||NRI||20%|
|115A||Dividend received in other cases||NRI or foreign co.||20%|
So now that you are aware of dividend tax rate, read ahead to find out about when to tax dividend income.
When to Tax Dividend Income
As per Section 8 of the Income Tax Act, 1961 for Dividend Income, any type of income declared, distributed, or paid by the company withing the subclause (a), (b), (c), (d), (e) of the Section 2 clause 22 will be considered to the previous year’s income as per its declared, distributed, or paid as per the scenario.
Also, any interim dividend will be considered to be the previous year’s income in which the dividend’s amount will be made unconditionally available by the company to any member who is entitled to the same.
Dividend Distribution Tax Calculation
The calculation method for dividend distribution tax, is also known as the complex gross payment method. The dividend distributed sum bracket can go anywhere from 85% to 100% and this will only happen if the 15% is applicable on the gross amount.
So, suppose that the dividend distributed is 100 and then 15% which will be applicable on the gross amount, then the grossing of dividend will be [100 /85*100] = 117.65 as Dividend Distribution Tax with 15% on 117.65 will be 17.65%. The surcharge will be 10% equal to 1.76. The education cess will be 3% which is 0.58%. Applying the effective dividend tax rate of 19.994% on INR 100.
New Tax Provision on Dividend Income
The dividend earned by an Indian corporation was made tax-free until March 31, 2020. (FY 2019-20). This was because the corporation announcing the dividend had already paid the dividend distribution tax (DDT) before payment.
The Finance Act of 2020, on the other hand, modified the way dividends are taxed. All dividends received on or after April 1, 2020, will be taxable in the hands of the investor/shareholder.
Enterprises and mutual funds are no longer liable for DDT. Similarly, the 10% tax on dividends income received by residents, HUFs, and firms over Rs 10 lakh (Section 115BBDA) has been repealed.
Tax Deduction on Dividend Income
The taxability that is posed on a dividend depends upon if the recipient is an investor or a trader in securities. Money earned through trade activities is subject to taxation as business income.
As a result, if shares are maintained for trading reasons, dividend income is taxable as income from a company or profession. Tax on Dividend income is imposed as income from other sources if shares are held as an investment.
When there is dividend taxability on business income, the assessed can deduct all expenses incurred to earn that dividend income, such as collection fees, interest on a loan, and so on.
If the dividend is taxable as income from other sources, the assessed can deduct just the interest expense required to earn the dividend income up to 20% of the total dividend income. Any additional expenses, such as commission or remuneration given to a banker or any other person to realize such dividend, are not deductible.
Now that you are aware of the tax on dividend income, you can file ITR on time and check whether you fall under the income tax slab or not. Dividends are a major income source for people dabbling in the mutual fund sector and investments. Adhere to the tax on dividend income rules set by the government of India and avoid becoming a defaulter.
Read more about Deferred Tax Liability.
Dividends are paid on a daily, monthly, quarterly, half-yearly, or annual basis, depending on the company or mutual fund institution that pays them.
If a shareholder receives a dividend from a domestic firm during Assessment Year 2020-21, he will not be obliged to pay any tax on the dividend since it is exempt from tax under section 10(34) of the Act. The domestic corporation, however, is obligated to pay a Dividend Distribution Tax (DDT) under section 115-O in such instances.
Dividends are considered income under the Internal Revenue Code.
DDT, also called Dividend Distribution Tax, is a certain kind of tax that enterprises are required to pay on dividends they pay out. Companies would not have to pay Dividend Distribution Tax (DDT) from FY 2020-21, according to the Budget 2020 address.
Any dividend amount received up to Rs. 10 Lakhs is tax-free under section 10 (34). Please note, that dividends received from any of the mutual fund companies are exempt without any specified maximum limit as per Section 10(35).
If you are an investor or a shareholder, you are bound to pay taxes on dividends if they exceed Rs. 10 Lakh. Till the time it doesn’t reach Rs. 10 Lakh, you don’t have to pay taxes.
Yes, you do need to declare ITR on dividend income. Dividend received from any Indian company is tax exempt when it is in the shareholder’s hand. Once the income exceeds Rs. 10 Lakh, the exceeding amount will be taxable and then you will have to file ITR 2.