Investors often receive income from their investments in shares or mutual funds in the form of dividends. Dividends represent a portion of the profits earned by companies or mutual funds and are distributed among shareholders. If you’re wondering whether dividends are subject to taxation, let’s delve deeper into the tax implications of dividend income.
Understanding Dividend Income
A dividend is the distribution of a company’s profits to its shareholders. It’s a reward for investing in the company’s shares or mutual fund schemes. According to the Income-tax Act Section 2(22), dividends also include:
- Distribution of accumulated earnings during the dissolution of a company.
- Issuance of bonus shares or debentures to shareholders from accumulated profits.
- Loans or advances given by a company to its shareholders from accumulated profits.
Sources of Dividend
Dividends can come from various sources, including:
- Domestic companies where you hold shares.
- Foreign companies where you hold shares.
- Equity mutual funds if you’ve opted for the dividend option.
- Debt mutual funds if you’ve opted for the dividend option.
Each source of dividend income may have different tax implications, which we’ll explore in detail.
Tax on Dividend Income
Before the Assessment Year 2020–21, dividends received from domestic companies were tax-exempt under Section 10(34) of the Income-tax Act, subject to certain conditions. However, the Finance Act of 2020 abolished the Dividend Distribution Tax (DDT), making dividend income taxable in the hands of investors at their applicable income tax slab rates.
The taxability of dividend income depends on whether the recipient is engaged in trading or investment activities. Dividends from shares held for trading purposes are taxed as business income, while dividends from shares held as investments are taxed as income from other sources.
Tax Rates for Dividend Income
The tax rate on dividends depends on the type of taxpayer and the medium through which dividends are received. For individuals, Hindu Undivided Families (HUFs), and firms, dividends are taxed according to the income tax slab rates applicable to them.
TDS on Dividend Income
Under Section 194 of the Income-tax Act, Indian companies must deduct tax at a rate of 10% from dividends paid to resident shareholders exceeding Rs. 5,000 in a financial year. The TDS is applicable to dividends declared or paid on or after April 1, 2020. Non-resident individuals may be subject to a higher TDS rate of 20%.
Deduction of Expenses from Dividend Income
The Finance Act of 2020 allows for the deduction of interest expenses paid against dividends. However, only 20% of the dividend income can be deducted as interest expenses. Other expenses, such as commissions or wages paid to obtain dividend income, cannot be deducted.
Advance Tax on Dividend Income
If a taxpayer’s total tax liability for a financial year is Rs. 10,000 or more, they are required to pay advance tax. Failure to pay advance tax may result in interest and penalties.
Form 15G/15H Submission
Resident individuals receiving dividends can submit Form 15G if their projected annual income is below the exemption threshold. Similarly, senior citizens can submit Form 15H if their projected annual tax liability is zero. These forms allow shareholders to receive dividend income without tax withholding.
Dividend from a Foreign Company
Dividends from foreign companies are taxable in India and are treated as income from other sources. The tax rate applicable to foreign dividends is the same as the individual’s applicable income tax slab rate. Additionally, TDS may be deducted at a rate of 10% for dividends exceeding Rs. 5,000.
Relief from Double Taxation
Dividends from foreign companies may be subject to taxation in both India and the foreign company’s country of origin. However, taxpayers may be eligible for double taxation relief under a double taxation avoidance agreement or Section 91 of the Income-tax Act.
Conclusion
Understanding the taxation of dividend income is crucial for taxpayers to fulfill their obligations and optimize their tax outcomes. Consulting with tax experts can help ensure compliance with tax laws and avoid penalties. By staying informed and seeking professional guidance, taxpayers can manage their dividend income tax efficiently.
Frequently Asked Questions
- How often do dividends get paid out? Dividends may be paid out daily, monthly, quarterly, half-yearly, or annually, depending on the mutual fund firm or company’s dividend policy.
- Do dividends require tax payment? Dividends from domestic companies were tax-exempt until Assessment Year 2020–21, but they are now taxable under the traditional tax system.
- Are dividends taxable in India? Yes, dividends are taxable in India as they are considered a form of income.
- What is dividend distribution tax (DDT)? DDT was a tax levied on domestic companies distributing dividends, but it was abolished as of April 1, 2020.
- What are the tax implications for shareholders receiving dividends? Shareholders are subject to tax on dividend income, which is included in their total income for the year and taxed at applicable rates.
- How can investors optimize tax outcomes on dividend earnings? Investors can explore tax-efficient investment strategies and utilize tax-saving accounts to minimize tax liabilities on dividend earnings.
- Are there specific tax considerations for foreign investors receiving dividends in India? Foreign investors may be subject to withholding tax on dividends, and the rates may vary based on tax treaties between India and the investor’s home country.
Are any expenses allowed as a deduction from dividend income under “income from other sources”? Only interest expenses paid on loans to purchase shares or mutual funds are deductible, up to a maximum of 20% of the total dividend income.
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