Companies may raise funds for running their operations by selling equity. Those who buy these stocks become shareholders in the company. This means they get ownership over a portion of the company. When companies perform well, they may choose to distribute their corporate earnings to shareholders who qualify for it. These payouts are called dividends. Dividends may be issued quarterly as interim dividends (issued before the financial year ends) or as final dividends when the company has completed its accounting. In essence, dividends may be considered as a benefit the company bestows for buying its shares. Some investors even use it as a strategy to earn passive income by planning their investment around companies that regularly issue dividends. However, you may want to note that tax is applicable on dividend income.
While the dividend is issued towards shareholding, there are various sources from which an investor may earn dividend income:
The applicable tax incidence is determined based on where the dividend income comes from.
The dividend income taxability depends on whether the recipient is trading securities for business purposes or investment. If the investor holds the shares for trading purposes (short-term), any dividend income gained in the interim is taxable based on norms for business income. On the contrary, if they hold it as an investment (long term), any dividend income earned is taxable based on rules for income from other sources.
When the dividend is taxable as business income, the taxpayer is eligible to claim deductions for all expenses incurred, such as interest paid on loans or costs of collection. However, if the taxability of the dividend is according to rules for income from other sources, the taxpayer can only claim a deduction for interest expenses incurred in earning the dividend income. This is limited to 20% of the total dividend income. Deductions are not allowed for any other expenses, including commissions or charges paid for collecting the dividend.
The tax rates on dividends vary depending on the recipient of the dividend and the instrument through which the dividend is distributed. The table below mentions these tax rates:
Source of data:
The Finance Act of 2020 introduced various provisions for tax on dividend income. This includes the imposition of TDS on dividends paid by organizations and mutual fund houses on or after April 1, 2020. The TDS rate on dividends of Rs 5,000 or more paid by organizations and mutual fund houses is usually 10%. However, resident Indians can claim the TDS deducted as a credit from the total tax liability while filing ITR.
Resident taxpayers must pay income tax on dividends received from foreign companies. Such dividends are considered income from other sources and are taxed based on the applicable rates.
For example, if the taxpayer falls under the 30% tax slab rate, then the foreign dividend income will also be taxed at 30%. Additionally, they will have to pay the Cess applicable.
The taxpayer is also eligible to claim a deduction for the interest paid, with a limit of 20% of the gross dividend income.
The foreign company that offers the dividend will deduct TDS based on section 194 of the Income-tax Act, 1961. For individuals, 10% TDS will be deducted from dividend income above Rs. 5,000. If the recipient of the dividend income does not provide PAN details, the TDS rate increases to 20%.
Dividend income is generally taxable in the year of declaration, distribution, or payment by the company, whichever is earlier. Final dividends, including deemed dividends, fall under this category. On the other hand, interim dividends are taxable in the preceding year in which the amount of dividend is released by the company to the shareholder. This means that interim dividends are chargeable to tax on a receipt basis. Overall, the taxation of dividend income depends on the type of dividend and the account from which it is received. A tax professional or financial advisor can offer better clarity on the specific tax implications of your dividend income.
Non-resident assessees who receive dividends from Indian companies must submit form 15G/15H to claim dividend income without TDS. They must submit the form within 90 days of receiving the dividend. If the assessee is not a resident of India or does not have a permanent establishment in India, they can claim exemption from tax. However, if they do not meet these criteria, they would incur tax on dividend income. A resident of India with an approximate annual income lower than the exemption limit can submit Form 15G to the company or mutual fund house that pays the dividend. A senior citizen who has no estimated annual tax payable can give Form 15H to the dividend-paying company.
When an individual sells a stock, they may be required to pay advance tax on any dividends received from the sale. The government imposes an additional tax on dividend income, a fixed rate of 15% or 20%. This varies based on the type of dividend received. If there is a shortage in the advance tax installment or it is not paid on time, no interest will be charged under Section 234C if the individual pays the full tax in subsequent advance tax installments. However, this exemption is not applicable for deemed dividends as mentioned in Section 2(22)(e).
Dividends are payouts made by companies to shareholders as a reward for their investment in the company. The taxability of dividend income in India depends on the source of the earning, and whether the recipient is into securities trading or investment. The tax rates on dividends also vary based on the nature of the dividend and the instrument through which it is distributed. The Finance Act of 2020 introduced TDS on dividends paid by companies and mutual funds, and the TDS rate varies based on the residential status of the recipient.
The TDS rate for dividend distribution from May 14, 2020, until March 31, 2021, was reduced to 7.5% to provide relief to investors.
The dividend tax-free limit or threshold of Rs 5,000 does not apply to HUF, firms, companies, trusts, etc. The TDS will be charged on the entire dividend amount.
The Rs 5,000 threshold is applicable only if the individual shareholder provides PAN; otherwise, the TDS rate will be 20%.
TDS deducted will be available as a credit from the taxpayer’s total tax liability while filing ITR.
The TDS rate for NRIs is 20%, and it is subject to the Double Taxation Avoidance Agreement (DTAA), if any.
The NRI can avail of the lower tax deduction benefits owing to any favorable treaty with the country where they live. However, to do so, they need to produce proof in the form of documents such as Form 10F, beneficial ownership declaration, tax residency certificate, etc. or it would lead to a higher TDS reduction from the dividend. NRI taxpayers can claim it while filing ITR.
Resident taxpayers must pay income tax on dividends received from foreign companies. Such dividends are considered income from other sources and are taxed based on the applicable rates.
For example, if the taxpayer falls under the 30% tax slab rate, then the foreign dividend income will also be taxed at 30%. Additionally, they will have to pay the cess applicable.
The taxpayer is also eligible to claim a deduction for the interest paid, with a limit of 20% of the gross dividend income.
The foreign company that offers the dividend will deduct TDS based on section 194 of the Income-tax Act, 1961. For individuals, 10% TDS will be deducted from dividend income above Rs. 5,000. If the recipient of the dividend income does not provide PAN details, the TDS rate increases to 20%.
Dividend income is generally taxable in the year of declaration, distribution, or payment by the company, whichever is earlier. Final dividends, including deemed dividends, fall under this category. On the other hand, interim dividends are taxable in the preceding year in which the amount of dividend is released by the company to the shareholder. This means that interim dividends are chargeable to tax on a receipt basis. Overall, the taxation of dividend income depends on the type of dividend and the account from which it is received. A tax professional or financial advisor can offer better clarity on the specific tax implications of your dividend income.
Non-resident assessees who receive dividends from Indian companies must submit form 15G/15H to claim dividend income without TDS. They must submit the form within 90 days of receiving the dividend. If the assessee is not a resident of India or does not have a permanent establishment in India, they can claim exemption from tax. However, if they do not meet these criteria, they would incur tax on dividend income. A resident of India with an approximate annual income lower than the exemption limit can submit Form 15G to the company or mutual fund house that pays the dividend. A senior citizen who has no estimated annual tax payable can give Form 15H to the dividend-paying company.
When an individual sells a stock, they may be required to pay advance tax on any dividends received from the sale. The government imposes an additional tax on dividend income, a fixed rate of 15% or 20%. This varies based on the type of dividend received. If there is a shortage in the advance tax installment or it is not paid on time, no interest will be charged under Section 234C if the individual pays the full tax in subsequent advance tax installments. However, this exemption is not applicable for deemed dividends as mentioned in Section 2(22).
Dividends are payouts made by companies to shareholders as a reward for their investment in the company. The taxability of dividend income in India depends on the source of the earning, and whether the recipient is into securities trading or investment. The tax rates on dividends also vary based on the nature of the dividend and the instrument through which it is distributed. The Finance Act of 2020 introduced TDS on dividends paid by companies and mutual funds, and the TDS rate varies based on the residential status of the recipient.