Tax on Dividend Income: What You Should Know

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If you have invested in shares lately then you must be wondering whether the dividend paid by the firm is subject to taxation or not. Well, yes, they are. Since dividends are regarded as income, they are taxable as per the Income Tax Act. The source of the dividend will decide the amount of tax that you will pay. Tax on dividend income can be confusing but don’t worry in this article, we will inform you all about it including dividend income tax rate.

Tax on Dividend Income: What You Should Know

Taxes have always been tricky thing to understand. If you are investor then complications increase because you have to calculate tax on different sources. Dividend income is one such source. Let us first understand it.

What is Dividend Income?

JAN23 Man picking up a coin

The amount given to the shareholders of the company is known as dividend income. It is possible to make money from held shares by receiving dividends, which are paid out from the company’s profits or earnings. Simply said, it is an incentive offered by the business to its stockholders for purchasing their shares. The dividends are often paid out in cash, although they could also be in the form of stocks or another type of asset. Dividends are paid to shareholders by profitable firms with steady profitability over the past years, which increases their trust in the business.

There are two types of dividend income:

1. Stock Dividends

Stock dividends are supplementary payments made to the current shares one already owns in the firm. That implies that the stock dividend raises the stock’s worth that shareholders possess. For example, if a 10% equity dividend was declared by XYZ Limited. This ultimately translates into each shareholder receiving an additional 100 shares for every 1000 shares they now own in the firm. You will then get an additional 200 shares as a dividend if your existing share count is 2000.

2. Cash Dividends

Cash dividends are given in exchange for the shares a person owns. For example, 2000 shares of ABC Company are owned by Mr. X. The board of directors announced dividend payments to the company’s shareholders following the quarter evaluation. The statement states that XYZ Limited would pay a dividend of INR 10 per share. Therefore, Mr. X will get a cash dividend of INR 15,000 for 1500 shares. Read further to understand about tax on dividend income India.

Companies distribute dividends to investors to reassure them of their financial stability. The investor interprets this as a positive indication of management anticipation and grows more confident in getting dividend payments regularly. Regular dividend payments aid in conveying information about a company’s future and luring in investors looking for reliable returns on their investments. More investors would invest in the firm as a consequence of this activity, thus raising the demand for that stock. As a result, the share price of the firm will also rise, which is incredibly advantageous and advised overall.

Changes in Taxability on Dividend Income

The Finance Act of 2020 eliminated DDT and reinstated the old taxation system, where investors were responsible for paying dividend taxes. A shareholder who received a dividend from a domestic firm up to Assessment Year (AY) 2020-21 was not needed to pay tax on that dividend since it was free from taxation under Section 10(34) of the Act, subject to Section 115BBDA.

It only permitted the taxability of dividends over Rs 10 lakh. However, the domestic business is obligated to pay Dividend Distribution Tax under section 115-O. (DDT). But with new taxability reforms, tax on dividend income by taxpayers is applicable at the relevant income tax slab rates, regardless of the amount received. Knowing these information will help calculate tax on dividend income.

What is DDT?

A 15% dividend income tax rate must be paid by every corporation that has declared, distributed, or paid any sum as a dividend in India. The DDT requirements were first established by the Finance Act of 1997. Only domestic businesses are accountable for the tax. Even though a domestic firm is not required to pay taxes on its earnings, it must nevertheless pay the tax. The DDT is no longer in use as of April 1, 2020.

Also Read: 40 Ways to Save Income Tax Legally in India

Dividend Income Tax Rates

Both, the kind of taxpayer earning the dividend and the method utilized to distribute it tend to affect the dividend tax rate. The table below will assist you in understanding rates of tax on dividend income India:

Taxpayer Type Nature Of The Dividend Tax Rate
Resident Dividend Paid By Domestic Firm Normal Tax Rate
FPI Dividend on Securities Except 115AB 20%
NRI Dividend on Indian Company Shares 20%
NRI Dividend on GDR of PSUs 20%
NRI Other Form Of Dividend Income 20%
Offshore Banking Unit Dividend on Securities Except 115AB 10%

Taxability of Dividend Income

The tax on dividend income depends on whether the dividend recipient is a trader or a stock investor. The revenue that the person makes from their trade activity is subject to taxation as “business income.” Therefore, dividend income is taxed under the category “income from business or profession” if shares are maintained for trading purposes. The income received in the form of dividends if shares are kept as an investment is subject to taxation under the category of “income from other sources.”

Dividend income is included in the shareholder’s taxable income according to the appropriate income tax slab rate. Following the rates, if the dividend income is more than INR 5000, a 7.5% TDS is required. Non-individual shareholders like corporations, Hindu undivided families, or businesses will be subjected to TDS but with no limit.

The taxpayer can claim a tax deduction of up to 20% of the gross dividend income for the interest expenses if the payout is taxed as income from other sources. Any extra costs, including commission or salary paid to get such a payout, are not tax deductible.

TDS on Dividend Income

Dividends delivered, announced, or received after or on April 1, 2020, are subject to TDS under Section 194. If the total amount of dividends paid to a shareholder exceeds Rs. 5,000, an Indian corporation will deduct tax at a rate of 10%. However, when a dividend is distributed to a non-resident or a foreign company, the tax is deducted according to Section 195 of the applicable DTAA. Any dividend paid or due to a life insurance company or a general insurance company about almost any shares would not be subject to a deduction of tax on dividend income.

Advance Tax on Dividend Income

If the taxpayer’s total tax due for a certain financial year is equal to or greater than INR 10,000, advance tax provisions are applicable. If the advance tax debt is not paid in full or is paid insufficiently, interest and penalties are put in place. And in the case, the taxpayer pays the entire amount of tax in advance tax payments, no interest will be levied under section 234C if the inability to pay it on time was caused by dividend income. However, this benefit will not apply to the supposed dividend described in Section 2 (22).

Submission of Form 15G/15H

A resident can submit Form 15G to the corporation or mutual fund that is disbursing the dividend if their estimated yearly income falls below the exemption threshold. Shareholders are notified of the dividend declaration by the company or mutual fund through their registered email address, along with instructions on how to file form 15G or form 15H to receive dividend income free of TDS. Similarly, an older person who expects to pay no taxes can submit Form 15H to the dividend distribution corporation.

Deduction of Expenses

The Finance Act of 2020 permits discounting interest costs incurred in connection with a payout of dividends. The deduction must not exceed 20% of the income from dividends. Any additional costs, such as commissions or compensation expenditures for generating the dividend income, are not deductible.

Tax on Dividend Income in India from Foreign Company

Any dividend from a foreign corporation is subject to taxes as “income from other sources”. The whole amount of dividends received from a foreign corporation will be included in the taxpayer’s total income and subject to taxes according to the appropriate dividend income tax rate bracket. Interest expenditure can be deducted from dividends received from foreign corporations up to a maximum of 20% of the total dividend income.

Under Section 194, Income-tax Act of 1961, the firm that is issuing the dividend will have to deduct TDS. According to this clause, 10% TDS is applied to dividend income for individuals over Rs. 5000; if the beneficiary of the dividend income does not provide a PAN, the rate will increase to 20%.

Double Taxation Relief

Double taxation occurs when the same income is taxed in the hands of the same business or person (taxpayer) in more than one nation. In this scenario, the taxpayer must pay tax on dividend income in both their place of residence and the nation where he receives income. So, if one is investing in shares that belong to some other country, then the dividend is taxable in the source country and India as well.

Provisions for double taxation relief have already been developed to reduce the double taxation of income. There are two ways to get double taxation relief: unilateral relief and bilateral relief. To protect Indian residents and citizens from double taxation, the government of India has signed the Double Tax Avoidance Agreement, a bilateral agreement, with more than 150 nations.

Only citizens of the nations that have signed the agreement can apply for the double tax reduction described in Section 90. A tax residence certificate, issued by the government of a certain nation, must be obtained if a resident of another nation wants to make a claim for relief from the double taxation problem.

There are two approaches to avoiding double taxation: the exemption technique and the tax credit method. Specific dividend income is taxed in only one of the countries under the exemption method and exempt in the other. The income is taxed jointly with the countries included in the income tax treaty, along with the country of residence, under the tax credit method. Read on to know how to avoid tax on dividend income India legally.

What is Inter-Corporate Dividend Tax?

Dividends between corporations are taxed differently from other dividends. Only the level of the firm that distributes the dividend is taxed. It is not subject to tax on the part of the beneficiary. An inter-corporate dividend that you receive from a business in which you own 10% or more shares is subject to a 30% tax.

Dividend taxation has been moved from corporations to shareholders starting AY 2020–21. To minimize the cascade effect when a domestic firm receives a dividend from another domestic company, the government has introduced a new Section to the Act, known as Section 80M. However, nothing is stopping a domestic corporation from collecting a dividend from a foreign corporation and paying it out to its shareholders.

A domestic firm that holds 26 percent or maybe more equity shares in a foreign corporation that pays a dividend to it is subject to a tax rate of 15 percent with a surcharge and education and health cess. Without taking into account any deductions for costs, you can directly calculate tax on dividend income.

Also Read: Gratuity Rules in India: Eligibility, Calculation, Taxation

Can you Avoid Paying Tax on Dividend Income?

JAN23 Person using calculator | tax on dividend income

Avoiding taxes is a punishable offense. But, you can always lessen the amount of taxes paid or in some cases avoid paying any through legitimate ways. Here are some of the possible methods that when utilizes, one can legally avoid paying tax on dividend income.

  • Avoid Churning: Avoid selling equities during the 60-day holding time to determine that any dividends qualify for the favorable capital gains rates.
  • Low Tax Bracket: One can skip paying taxes on eligible dividends, but not unqualified dividends, if you can use tax deductions to bring your income below certain thresholds and stay within the lower income tax bracket.
  • Avoid Dividend Paying Companies: Instead of providing dividends to shareholders, young, quickly expanding businesses frequently reinvest all profits to support expansion. Indeed, you won’t receive any quarterly revenue from their shares. However, as long as you owned the shares for more than a year, you can sell your shares at a profit and pay long-term capital gains on the earnings if the company succeeds and its stock price grows.
  • Choose Tax-Advantaged Accounts: if you maintain the high-dividend payers in tax-advantaged accounts, you might be able to reduce the tax hit even further.

Note: Reinvesting your dividends won’t help you avoid paying taxes. Dividends are considered taxable income regardless of whether they are deposited into your account or reinvested in the business.

Don’t let concerns about taxes prevent you from putting your money in dividend-paying companies since dividend stocks can be a wonderful strategy to increase your wealth and augment your income. Even so, one should make some preparations to guarantee that they pay the least amount of money possible by understanding how dividends are taxed.

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