As an Indian taxpayer, it is possible to be confused about how to report dividend income on your income tax return. Is it necessary to pay taxes on dividend revenue? The Finance Act of 2020 moved the taxability of dividend earning from the dividend declaring firm to individual investors.

This blog will provide a broad look at the tax provisions concerning ‘dividend income’ and their tax effects.

Let’s start with the basics.

What is Dividend?

A dividend can be defined as the broad distribution of a portion of a company’s revenues to a certain group of shareholders, as chosen by the management/directors board. Regular shareholders of most dividend-paying firms are usually eligible if they possess the shares prior to the ex-dividend day.

Dividends can be given out in money or as extra equity.

What is Dividend Distribution Tax?

A firm in India that has announced, distributed, or transferred any sum as a dividend is liable to submit a DDT (Dividend Distribution Tax) of 15%. The requirements for DDT were included in the Finance Act of 1997.

All domestic corporations are subject to tax. Domestic firms must submit the tax amount even if they are not required to pay any income tax. The Dividend Distribution Tax will be phased out on April 1, 2020.

Taxation on Dividend Income: Old Tax Provision

The dividend income from an Indian corporation was exempt till March 31, 2020, i.e. Financial Year 2019-20. This was due to the fact that the corporation announcing such a dividend reward had already incurred DDT (Dividend Distribution Tax) prior to making the payment.

Taxation on Dividend Income: New Tax Provision

The Finance Act of 2020 altered the way of taxing dividends. All dividend income received after or on 1st April 2020, is now chargeable to tax from the shareholder or the investor.

The Dividend Distribution Tax responsibility for corporations and mutual funds has been removed. Likewise, the 10% tax on dividend payments of resident citizens, HUFs, and corporations in excess of 10,00,000 INR is repealed under Section 115BBDA.

Taxation on Dividend Income: Tax Deducted at Source

The Finance Act of 2020 levies a Tax Deducted at Source on dividend distributions made by corporations and mutual funds beginning after or on 1st April 2020. TDS is normally levied at a proportion of 10% on dividend earnings in excess of 5,000 INR received from a corporation or mutual fund. Nevertheless, as a COVID-19 alleviation measure, the Indian government cut the TDS proportion for distributing from May 14, 2020, to March 31, 2021, to 7.5%.

The tax paid will be accessible as a credit against the taxpayer’s overall tax burden upon submitting ITR. For example, on July 25, 2020, Mr Shankar got a dividend of 10,000 INR from an Indian firm. Because his dividend income surpasses the threshold of 5,000 INR, the corporation will charge a TDS of 750 INR on the dividend earnings. Mr Shankar will get the remaining 9,250 INR. Furthermore, the dividend income represents Mr Shankar’s taxable income, taxed at the appropriate slab rates in effect for the Fiscal year 2020-21 and Assessment Year 2021-22.

TDS is needed to be charged at the proportion of 20% for non-residents, according to any DTAA (double taxation avoidance agreement). To take advantage of the reduced deduction owing to an advantageous treaty rate with the country, the non-resident must produce documented verification like Form 10F, statement of beneficial ownership, certification of tax residency, and so on. In the lack of certain papers, greater TDS will be deducted, which can be claimed when submitting an Income tax return.

Taxation on Dividend Income: Expenses Deduction

The Finance Act of 2020 also allows for the deductibility of interest expenses spent against dividends.

The reduction should not be more than 20% of the income from dividends received. You cannot, however, seek deductions for any other expenses involved in producing the dividend earnings, such as commissions or wages.

Taxation on Dividend Income: Advance Taxes

Advance tax regulations are applicable if the taxpayer’s overall tax due in a given fiscal year is equivalent to or greater than 10,000 INR. In the event of non-payment or underpayment of the due advance tax, interest and penalties are assessed.

Form 15H and Form 15G 

Forms 15H and 15G are some self-declaration documents that a person sends to his/her bank or other financial institutions to ask that Tax Deducted at Source on interest earnings not be deducted since their earnings fall below the baseline exemption level.

It is necessary to provide PAN for this. Most banks enable you to file these application forms online via their website.

Form 15H

Form 15G

Only Senior Citizens i.e Individuals who are 60 years old or older are eligible.

Resident person, HUF, trusts, or any similar entity, but not a business or firm is eligible. But, they need to be under the age of 60 years.

The tax imposed on your overall income needs to be nil.

The tax imposed on your overall income needs to be nil.

Non-residents are not eligible.

Non-residents are not eligible.

The overall interest income taxable for that year needs to be below the year’s baseline exemption ceiling, which is 2,50,000 INR for Fiscal Year 2020-21 and Assessment Year 2021-22.

Please Note:

  • Forms 15H and 15G are only available to ‘residents,’ thus a non-resident is not eligible to benefit from them.
  • The criterion of interest income exceeding the baseline exemption limit applies solely to form 15H and not to form 15G. Senior citizens can file Form 15H even if their interest income exceeds the baseline tax exemption level, as long as their taxable earnings (after applying deductions) are less than the exemption threshold.

Taxation on Dividend Income: Submission of Form 15H and Form 15G:

Form 15G can be submitted to the corporation or the mutual fund distributing the dividend by a resident taxpayer receiving dividends whose expected yearly income is less than the exemption level.

Likewise, a senior person whose anticipated yearly tax payable is zero might file Form 15H with the corporation that is receiving the dividend.

The corporation or mutual fund sends the dividend statement to the investor’s registered email address and needs the filing of Form 15H or Form 15G to collect dividend earnings without Tax Deducted at Source.

Taxation on Dividend Income: Dividend from a Foreign Organization

  • Dividend incomes from a foreign corporation is eligible for taxation. It will be taxed under the heading “income from other sources.”
  • Dividend incomes from an overseas corporation are reflected in the taxpayer’s overall earnings and are taxed at the taxpayer’s appropriate percentages. For example, if the taxpayer falls under the 30% tax bracket, the dividend income will be taxed at 30%, in addition to the cess.
  • In the event of an overseas dividend income, the shareholder can only subtract interest expenses up to 20% maximum of the total dividend earnings.
  • Nevertheless, under Section 194, the corporation declaring the dividend must subtract TDS. According to this provision, 10 percent TDS is applied for dividend earnings over 5,000 INR for a person; this rate would be enhanced to 20 per cent if the beneficiary of dividend revenue fails to submit a PAN.

Double Taxation 

Tax on dividend incomes from foreign firms is taxed in both the overseas firm’s home country as well as in India.

Nevertheless, if the taxes on an overseas firm’s dividend are paid twice — in other words in both countries, double taxation relief can be paid by the taxpayer.

The relief sought might be based on the conditions of a double taxation avoidance contract agreed upon by the Indian government with the nation to which the overseas firm resides, or it can be based on Section 91 of the Income Tax Act. This implies that the taxpayer will not have to spend tax repeatedly on the same amount of income.


FAQ’s

The different types of dividends are

  • Cash 
  • Stock 
  • Property 
  • Scrip 
  • Liquidating

Dividends are payments made to investors who have participated in a firm’s stock that is generally derived from the firm’s net earnings. The majority of profits are maintained by firms as retained earnings, which represent cash to be utilized for existing and future commercial activity. The remainder, on the other hand, is frequently distributed to shareholders as dividends. 

Dividends can be paid out by a firm’s director board on a regular basis. Firms can also offer non-recurring distinctive dividends separately or in parallel to a scheduled distribution.