Dividends are one of the most lucrative passive incomes and benefits of investing in stocks. However, the tax on dividend income in India was subject to a major change after the Finance Act 2020. It shifted the taxability of the dividend income from the hands of the company to the hands of the shareholders. This was followed by confusion in the minds of the taxpayers as to how dividend income is taxed and what will be the tax rate.
Here's everything about income tax on dividend income received from companies. But before that, let’s look at the earlier taxation provisions.
Before the Finance Act, 2020, the dividends were taxed in the hands of the company. The companies were liable to pay Dividend Distribution Tax (DDT) on the dividends distributed to their shareholders. The method of calculating DDT was slightly different than the normal tax calculation. The rate of DDT was 15% of the gross dividends paid by the companies.
However, if the dividend received by a resident Indian from a domestic company exceeded Rs. 10 lakhs during the financial year, then Section 115BBDA became applicable. In such case, the amount of divided exceeding Rs. 10 lakhs were taxed @10%. Further, no deduction in relation to any expenditure, allowance or set off of any loss was allowed to the assessee.
After the Finance Act 2020, the tax on dividend income was shifted into the hands of the shareholders. Consequently, the dividend taxation tax was withdrawn. As per the current provisions of the income tax law, the taxpayers should include the dividend income under the head ‘Income From Other Sources’. However, if the shares are held as stock in trade, then the dividend income should be treated as business income. The companies are no longer required to pay dividend distribution tax.
The government has not specified any fixed tax rate for dividend income taxable in the hands of the shareholders. The rate of tax on dividend income depends upon the tax rate applicable to the shareholders. The rate at which the shareholder is taxable shall also be the tax rate applicable to their dividend income. For instance, if you fall in the 20% tax slab, then your dividend income will also be taxed at 20%. But if you fall in the 30% tax slab, then your dividend income will also be taxed at 30%.
The dividend income is also subject to TDS under the income tax law. In case the dividend income exceeds Rs. 5000, then TDS @10% shall be deducted from such income. The TDS deducted on dividends can be claimed as a refund if the tax liability is lower than the TDS or advance tax paid by the taxpayer. However, in the case of non-residents, the TDS should be deducted at the rate of 20%, subject to the provisions of the Double Taxation Avoidance Agreement (DTAA). For claiming the benefit of a lower TDS rate under DTAA, the non-resident needs to submit documentary proof such as a certificate of tax residency, declaration of the beneficial ownership, Form 10F etc.
In certain peculiar cases, you can receive your dividend income without a TDS deduction. In case you are a resident individual with an estimated annual income less than the exemption limit, then you can submit Form 15G to the company or mutual fund house that is paying you the dividend. Similarly, if you are a senior citizen whose tax liability is estimated to be NIL can submit Form 15H. Upon receiving the form, you can receive dividends without deduction of TDS.
The income tax law allows the deduction of expenses incurred for generating income. As per the Finance Act, 2020, you can claim a deduction of the interest expense against your dividend income. However, it should be noted that you are not allowed to claim a deduction of any other expense against your dividend income. The interest expense necessarily depicts expenses on money borrowed to invest in the shares to earn dividend income.
Following were the detailed requirements and current provisions relating to the tax on dividend income in India. In case you have any queries, feel free to contact the ASC Group.
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