Income tax on Dividend income

Dividend income is a key source of earnings for many investors, encompassing payouts from shares, mutual funds, and equity-linked investments. However, the tax implications of such income often spark questions. Under the old provisions, dividend income was largely exempt in the hands of investors due to the Dividend Distribution Tax (DDT) paid by companies, but the new regime shifts the tax burden to recipients. The applicable dividend tax rate varies depending on the source—Indian or foreign companies—along with specific rules for claiming deductions on related expenses. Tax Deducted at Source (TDS) on dividends and the submission of forms like 15G or 15H to avoid excess deductions are critical considerations. Investors must also factor in advance tax liabilities on dividend income and explore relief measures like foreign tax credits to address double taxation on dividends from overseas entities. This guide unpacks these aspects to help you navigate the taxability of dividend income with clarity.

What is Dividend Income?

Dividend income refers to the earnings distributed by a company or mutual fund to its shareholders or unit holders from the profits it generates. It represents a share of the company’s earnings returned to its investors as a reward for their investment. Dividends can be issued in various forms, such as cash, additional shares (stock dividends), or other property, depending on the company’s policy. This income is taxable under the head “Income from Other Sources” in the Income Tax Act, subject to specific provisions and conditions. For investors, dividend income is an attractive form of passive earning, but it also comes with tax obligations that vary depending on the nature and source of the dividend.

However, according to Section 2(22) of the Income-tax Act, the concept of a dividend is broad and includes several other forms of distributions:

  • The distribution of accumulated profits to shareholders involves the release of the company’s assets.
  • The issuance of debentures or deposit certificates to shareholders from the company’s accumulated profits, along with the allocation of bonus shares to preference shareholders from these profits.
  • Distributions made to shareholders during the company’s liquidation are derived from accumulated profits.
  • Distributions to shareholders from accumulated profits when the company reduces its capital.
  • Loans or advances a closely held company makes to its shareholders from its accumulated profits.

Sources of Dividend Income

Dividend income can come from multiple sources, primarily categorized as domestic or foreign:

  1. Dividend from Indian Companies:

    • These are dividends distributed by companies registered in India. After the abolition of the Dividend Distribution Tax (DDT), such dividends are now taxable in the hands of shareholders.
    • Indian mutual funds offering dividends are another common source of domestic dividend income.
  2. Dividend from Foreign Companies:

    • Dividends received from companies based outside India are also taxable in the hands of the investor.
    • Such income may be subject to double taxation, but relief can often be claimed under Double Taxation Avoidance Agreements (DTAAs).
  3. Other Sources:

    • Dividends from co-operative societies or trusts.
    • Dividends received on shares held in joint stock companies or as a beneficiary in specific funds.

Old v/s New Provision for Taxability of Dividend Income

The taxability of dividend income underwent a significant shift after the Finance Act 2020:

  1. Old Provision (Pre-April 1, 2020):

    • Under the old regime, dividends distributed by Indian companies were tax-free in the hands of shareholders. This was because companies were required to pay a Dividend Distribution Tax (DDT) before distributing profits.
    • The DDT was levied at 15% (plus applicable surcharges and cess) under Section 115-O on the net dividend distributed.
    • Shareholders were taxed only if their aggregate dividend income exceeded ₹10 lakh in a financial year, in which case an additional tax of 10% was levied under Section 115BBDA.
  2. New Provision (Effective from April 1, 2020):

    • DDT has been abolished, and the entire burden of tax on dividend income has shifted to the shareholders.
    • Now, dividend income is taxed in the hands of the recipient as per their applicable income tax slab rates.
    • This change aims to make the taxation process more equitable, especially for small investors who fall under lower tax slabs.

Dividend tax rates

tax on dividend income

Dividend Received From an Indian Company

Dividends received from an Indian company are taxable in the hands of the recipient under the Income from Other Sources category. After the abolition of Dividend Distribution Tax (DDT) from April 1, 2020, these dividends are no longer tax-free. Instead:

  • The amount is included in the recipient’s total income and taxed as per their applicable income tax slab rate for resident and at 20% for non resident.
  • TDS (Tax Deducted at Source) at 10% is deducted by the company if the dividend exceeds ₹5,000 in a financial year (Section 194).
  • Resident taxpayers can avoid TDS deductions by submitting Form 15G/15H, subject to eligibility criteria.
    This new system ensures transparency but places a compliance burden on taxpayers to report and pay taxes on their dividend earnings.

TDS on Dividend Income

Tax Deducted at Source (TDS) is a crucial mechanism for ensuring tax compliance on dividend income. Key provisions include:

  • TDS at 10% is applicable if the dividend payment exceeds ₹5,000 in a financial year.
  • For non-residents, TDS is deducted at 20%, along with applicable surcharge and cess.
  • No TDS is deducted if:
    • The total dividend is less than ₹5,000.
    • Valid Form 15G/15H is submitted, certifying that the recipient’s total income does not exceed the taxable limit.
    • The dividend is paid to certain exempt entities like mutual funds or insurance companies.

TDS deducted can be claimed as a credit while filing income tax returns, ensuring no double taxation.

Deduction of Expenses from Dividend Income

Taxpayers can claim deductions for specific expenses incurred in earning dividend income.

  • Permissible Deductions:

    • Interest on Loans: Interest paid on borrowed capital used for investment in shares or mutual funds is deductible under Section 57.
    • The maximum allowable deduction is limited to 20% of the total dividend income received.
  • Expenses Not Allowed:

    • Commission or brokerage for purchasing shares.
    • Any personal or capital expenditure.

By claiming these deductions, taxpayers can reduce their taxable income and overall tax liability.

Submission of Form 15G/15H

Form 15G and Form 15H are declarations submitted to avoid TDS deductions if the recipient’s income is below the taxable limit.

  • Eligibility for Form 15G:

    • Applicable to individuals below 60 years and HUFs.
    • Total income, including dividends, should not exceed the basic exemption limit (₹2,50,000).
  • Eligibility for Form 15H:

    • Applicable to senior citizens (60 years and above).
    • Tax payable on total income, including dividends, should be nil.

Filing these forms with the dividend-paying company or mutual fund ensures that no TDS is deducted, easing cash flow for small investors and senior citizens.

Advance Tax on Dividend Income

Dividend income is subject to advance tax provisions, where taxpayers must pay taxes in installments if their total tax liability exceeds ₹10,000 in a financial year.

  • Under the new regime, dividend income is taxable on a receipt basis. Taxpayers need to estimate their dividend income for advance tax calculations.
  • Due Dates for Advance Tax Payments:
    • 15% by June 15.
    • 45% by September 15.
    • 75% by December 15.
    • 100% by March 15.

Failure to pay advance tax on time may attract interest under Section 234B and Section 234C. Investors should carefully track their dividend receipts and make timely payments to avoid penalties.

Dividend Received From Foreign Company

Dividends received from a foreign company are taxable in India as Income from Other Sources under the Income Tax Act, 1961.

Key points to consider:

Taxability in India: Dividends from foreign companies are added to the total income of the recipient and taxed at the applicable income tax slab rates for individuals or the corporate tax rate for companies.

These dividends are not subject to the 10% TDS rate applicable to domestic dividends, but the recipient may need to report them in their income tax return.

Foreign Tax Deduction: Foreign companies may deduct taxes on dividends at the rate specified by their local tax laws. This is typically outlined in the Double Taxation Avoidance Agreement (DTAA) between India and the respective country.

For example, if the DTAA specifies a tax rate of 15%, the foreign company may deduct this tax before remitting the dividend.

Exchange Rate Consideration: Dividends received in foreign currency must be converted into Indian Rupees using the prescribed exchange rate on the date of receipt. The amount after conversion is the taxable income in India.

Reporting Requirement: Such dividends must be disclosed in the appropriate schedule of the income tax return form (ITR-2 or ITR-3 for individuals).

Relief from Double Taxation

India has signed Double Taxation Avoidance Agreements (DTAA) with various countries to prevent the same income from being taxed in both India and the foreign country. Here’s how relief from double taxation works for dividend income:

Types of Relief Available:

Exemption Method: Under this method, dividend income is taxable only in one country, either India or the foreign country, as per the DTAA.

Credit Method: Taxes paid in the foreign country on dividend income can be claimed as a credit against the tax payable in India, ensuring no double taxation occurs.

Conditions for Claiming Relief:

Taxpayer must provide proof of taxes paid in the foreign country, such as a withholding tax certificate or Form 16A equivalent issued by the foreign company.

The taxpayer must correctly declare foreign income in the Indian tax return and compute the relief as per DTAA provisions.

DTAA Rates:

Most DTAAs specify a reduced tax rate (usually 10%-15%) for dividends. For instance:

  • USA: 15%
  • UK: 10%
  • Singapore: 10%

Form 67 Submission:

Taxpayers claiming foreign tax credit must submit Form 67 online before filing their income tax return. This ensures the Indian tax authorities accept the credit for foreign taxes paid.

By leveraging DTAA provisions and maintaining proper documentation, taxpayers can effectively manage their tax liability on foreign dividends and avoid double taxation.

All Services across Bharat

  1. Income tax
  2. GST
  3. Business registration
  4. Accounting
  5. Audit
  6. ROC filings
  7. Certificates
  8. Project report or CMA data
Scroll to Top