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You may get a dividend from a company or from the mutual fund in India.  Do you need to pay tax on dividend income? Dividend received from an Indian company was exempt till 10 lakh until 31 March 2020 (FY 2019-20) as the company were paying dividend distribution tax (DDT).  Dividend received on or after 1 April 2020 is taxable in the hands of the investor/shareholder. This article covers how are dividend received from stocks, mutual funds taxed. How is it different from earlier years. Also covers dividend distribution tax (DDT) and how its abolition impacts tax.

Dividend and Tax

Dividend received on or after 1 April 2020 is taxable in the hands of the investor/shareholder.

The dividend is taxable, comes under Income from Other sources and is taxed at the income tax slab rates for FY 2020-21 (AY 2021-22). Income from Other sources include income such as the interest of Saving Bank Account, Fixed Deposit, Recurring Deposit, Senior Citizen Saving Scheme(SCSS) etc and it needs to be shown in the Income Tax return. Our article Income From Other Sources explains it in detail.

TDS: There is a 10% TDS on dividend if it is more than Rs 5,000 from a company or mutual fund. But as a COVID-19 relief measure, the government has reduced the TDS rate to 7.5% for distribution from 14 May 2020 until 31 March 2021.

Submission of Form 15G/15H: A resident individual receiving dividends whose estimated annual income is below the exemption limit can submit form 15G (15H for senior citizens) to the company or mutual fund paying the dividend.  The company or mutual fund will inform the shareholder about the dividend declaration on their registered mail id and would require submission of form 15G or form 15H to claim dividend income without TDS. Our article What is Form 15G? What is Form 15H? explains it in detail.

Deduction of interest expense: Introduced from 1 Apr 2020. If one borrows money to invest in equity then one can claim a deduction of interest expense incurred against the dividend. The deduction should not exceed 20% of the dividend income received. However, you are not entitled to claim a deduction for any other expenditure incurred for earning the dividend income.

For example,

On 5 June 2020, Aryan receives a dividend of Rs 6,000 from an Indian company. As his dividend income is more than Rs 5,000, the company will deduct a TDS @7.5% on the dividend which is Rs 450. So Aryan will receive the amount of Rs 5,550(6000-450). The dividend income is taxed at the slab rates applicable for FY 2020-21 (AY 2021-22).

if Aryan borrowed money to invest in equity shares and paid interest of Rs 2,700 during FY 2020-21, then he can claim Rs 540 as an interest deduction.

Dividend and Tax Withdrawn

From 1 Apr 2020, following are withdrawn

  • Dividend distribution tax (DDT) on companies and mutual funds.  In India, a company which has declared, distributed or paid any amount as a dividend, was required to pay a dividend distribution tax at 15% plus applicable surcharge and cess taking the effective rate to 20.6%.  DDT was introduced in 1997 at a 7.5% flat rate in an effort towards efficient tax collection, but the rate has increased over a period of time which has attracted criticism for unnecessarily burdening companies. Interestingly, DDT was scrapped in 2002 only to be re-introduced in the next year on grounds of ease of tax administration. People also argued that it amounts to double taxation, after paying a corporate tax at 25%, the effective tax rate, including DDT, for Indian firms worked out to be 48.5%.
  • The tax of 10% on the dividend of more than Rs 10 lakh (Section 115BBDA) for resident individuals, HUF and firms.

Impact of Dividend on resident shareholders

Resident individual taxpayers, Trusts, etc., in the highest income slab with income above 5 crores, will now have to pay more tax for dividend income as the effective tax rate is 42.7% ( rate of 30% (plus surcharge at 37% and cess at 4%). Earlier, the effective tax rate on their dividend income was 34.8% [i.e. DDT at 20.6% plus income tax at 14.2% (ie. tax at 10% plus surcharge at 37% and education cess at 4%) under section 115BBDA].

Resident individual taxpayers in the lower slabs such as 10% will now be subject to tax at the effective tax rate of 10.4% (10% plus education cess at 4%) will pay less tax.

Indian firms and LLPs will have to pay more tax outflow under the new dividend taxation regime.  Now they have to pay tax at 34.90% (tax rate of 30% plus surcharge at 12% and education cess at 4%) while earlier they had an effective rate of 32.20% [DDT at 20.6% plus tax at 11.60% (10% plus surcharge at 12% and education cess at 4%) under section 115BBDA]

Dividend Received from Foreign Company

There is no change in How Dividend received from foreign Company is taxed.

Dividend received from a foreign company is taxable. It is charged to tax under the head Income from other sources at the rates applicable to the taxpayer. For instance, if the taxpayer comes in the 30% tax slab rate, then such dividend will also be taxable at 30% along with cess.

Even in the case of foreign dividend, the investor can claim deduction only for the interest expense restricted to 20% of the gross dividend income.

Double Taxation:  means that the taxpayer shouldn’t have to pay tax on the same income twice.  For example, if a US MNC like Microsoft, gives dividend then it might deduct tax on it. Now one should not pay tax again on the same income to the extent of what is deducted. The taxpayer can claim double taxation relief(DTAA) for the tax already deducted. The relief claimed can be either as per the provisions of double taxation avoidance agreement(DTAA) entered into by the Government of India, with the country to which the foreign company belongs, or he can claim relief as per Section 91 (in case no such agreement exists).

If any tax is deducted in US then US IRS department will send Form similar to Form 16 to your address.

If any tax is deducted, you can claim it in your ITR as shown below from ITR2.

ITR DTAA tax

ITR DTAA tax

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