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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?
Finance Act 2020 shifted the taxability on dividend income from the hands of the dividend declaring the company to the individual investors.
In this article, we will discuss the old and the new tax provision related to ‘dividend income’ and its tax implications.
After the abolition of the dividend distribution tax, the taxability of ‘dividend income is now in the hands of the investors.
The Finance Act, 2020 also provides for 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 like commission or salary expense incurred for earning the dividend income.
In the above example, if Mr Ravi borrowed money to invest in equity shares and paid interest of Rs 2,700 during FY 2020-21, only Rs 1,200 is allowable as an interest deduction.
Advance tax provisions apply if the total tax liability of the taxpayer is equal to or more than Rs.10,000 in a particular financial year. Interest and penalty is levied in case of non-payment or short payment of the advance tax liability.
A resident individual receiving dividends whose estimated annual income is below the exemption limit can submit form 15G to the company or mutual fund paying the dividend.
Similarly, a senior citizen whose estimated annual tax payable is nil can submit Form 15H to the company paying the dividend.
The company or mutual fund informs the shareholder about the dividend declaration on their registered mail id and requires submission of form 15G or form 15H to claim dividend income without TDS.
Dividend received from a foreign company is taxable. It will be charged to tax under the head “income from other sources.”
Dividends 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 at 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.
However, the company declaring the dividend will have to deduct TDS under section 194 of the Income-tax Act, 1961. As per this section, 10% TDS is applicable for dividend income above Rs.5000 for an individual; this rate will be increased to 20% in the absence of PAN submission by the recipient of dividend income.
Dividend received from a foreign company gets taxed both in India and in the home country of the foreign company.
However, if the tax on an international company’s dividend has been paid twice (i.e. paid in both the nations), then the taxpayer can claim double taxation relief.
The relief claimed can be either as per the provisions of double taxation avoidance agreement 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). This means that the taxpayer doesn’t have to pay tax on the same income twice.
Yes, in the case of dividends, the amount paid as interest on any monies borrowed to invest in the shares or mutual funds is allowable as a deduction. The interest deduction is limited to 20% of the gross dividend income received. However, any other expense such as commission or remuneration to a banker or any other person to realise such dividend on behalf of the taxpayer is not allowable as a deduction. The restrictions apply to dividend receipts from domestic as well as foreign companies.
Yes, in the case of dividends, the amount paid as interest on any monies borrowed to invest in the shares or mutual funds is allowable as a deduction.
The interest deduction is limited to 20% of the gross dividend income received. However, any other expense such as commission or remuneration to a banker or any other person to realise such dividend on behalf of the taxpayer is not allowable as a deduction. The restrictions apply to dividend receipts from domestic as well as foreign companies.
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 Finance Act, 1997 introduced the provisions of DDT.
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 their income. The DDT stands withdrawn w.e.f 1 April 2020.