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 was exempt until 31 March 2020 (FY 2019-20). That was because the company declaring such dividend already paid dividend distribution tax (DDT) before making payment.
However, the Finance Act, 2020 changed the method of dividend taxation. Henceforth, all dividend received on or after 1 April 2020 is taxable in the hands of the investor/shareholder. The DDT liability on companies and mutual funds stand withdrawn. Similarly, the tax of 10% on dividend receipts of resident individuals, HUF and firms in excess of Rs 10 lakh (Section 115BBDA) also stands withdrawn.
The Finance Act, 2020 also imposes a TDS on dividend distribution by companies and mutual funds on or after 1 April 2020. The normal rate of TDS is 10% on dividend income paid in excess of Rs 5,000 from a company or mutual fund. However, as a COVID-19 relief measure, the government reduced the TDS rate to 7.5% for distribution from 14 May 2020 until 31 March 2021.
For instance, Mr Ravi received dividend amounting to Rs 6,000 from an Indian company on 15 June 2020. Since his dividend income exceeds Rs 5,000, the company will deduct a TDS @7.5% on the dividend income which is Rs 450. Mr Ravi will receive the balance amount of Rs 5,550. Further, the dividend income is the taxable income of Mr Ravi taxed at the slab rates applicable for FY 2020-21 (AY 2021-22).
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 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.
Submission of Form 15G/15H: 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 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 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.
Relief from Double Taxation
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.
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 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.
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 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.