As a taxpayer, you may be unsure about how to treat dividend income while filing your tax return. Do you need to pay tax on dividend income? Let us address tax implications when you have earned dividend income.
Dividend Received from an Indian Company
Dividend received from an Indian company is exempt from tax.This is because the company declaring such dividend already deducts dividend distribution tax (DDT) before making payment.
However, as introduced by the Finance Act 2016, the dividend received shall be chargeable to tax at the rate of 10% in the case of a resident individual/HUF/Firm, if the aggregate amount of dividends received from a domestic company during the year exceeds Rs 10,00,000 (Section 115BBDA). It is to be noted that tax shall be chargeable on dividend income only to the extent it exceeds Rs 10 lakhs in aggregate from Indian companies.
For instance, Mr. Ravi received dividend amounting to Rs 15 lakh from various Indian companies during the year. Since his dividend income exceeds Rs 10 lakh, he will have to pay tax @10% on the dividend income in excess of Rs 10 lakh i.e. Rs 5 lakh. Hence, the tax payable will be Rs 50,000 (10% of 5 lakh).
Dividend Received from Foreign Company
Dividend received from a foreign company is taxable. It will be charged to tax under the head “income from other sources.”
Dividend received from a foreign company will be included in the total income of the taxpayer and will be charged to tax at the rates applicable to the taxpayer. For instance, if the taxpayer comes in the 20% tax slab rate, then such dividend will also be taxable at 20% along with cess.
Relief from Double Taxation
Dividend received from a foreign company gets taxed in India as well as in the country in which the foreign company belongs. However, if the tax on a foreign company’s dividend has been paid twice (i.e. paid in both the countries), then the taxpayer can claim double taxation relief. The relief claimed can be either as per the provisions of the Double Taxation Avoidance Agreement, if any, 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). Basically, this means that the taxpayer doesn’t have to pay tax on the same income twice.
Question – 1: Are there any expenses which are allowed as a deduction from dividend income under the head “income from other sources”?
Answer:Yes. In the case of dividends, the amount paid as commission or remuneration to a banker or any other person for the purpose of realizing such dividend on behalf of the taxpayer will be allowed as a deduction. For instance, you have received dividend income from a foreign company, which will be taxable under the head ‘Income from other sources’. You have also paid a commission to the agent for realising such dividend. Then this commission paid will be allowed as a deduction (u/s 57) from your taxable dividend income.
Question – 2: What is dividend distribution tax (DDT)?
Answer: In India, a company which has declared, distributed or paid any amount as a dividend, is required to pay a dividend distribution tax at 15%. The provisions of DDT were introduced by the Finance Act, 1997. Only a domestic company is liable for the tax. Domestic companies have to pay the tax even if the company is not liable to pay any tax on its income.