All About Income Tax on Dividends Income

Dividends are not free money — they are commonly taxable income but when and how you own an investment that pays them can adequately and dramatically change the dividend tax rate you pay. There is a number of exceptions & unusual scenarios with special rules.

An Individual may receive a dividend from their equity or mutual fund investments. The dividends received were tax-exempt until 31 March 2020 i.e. FY 2019-20. The exemption was there because the company or mutual fund paying the dividend was required to pay a dividend distribution tax aka DDT. Indian Budget 2020 changes the process of taxation by enforcing the liability to pay tax on the shareholders rather than the company.

Budget 2020 has proposed to make dividend income from shares & mutual funds taxable in the hands of the recipient at the applicable income tax slab rates to the individual and annul the DDT hitherto levied on dividend income before distribution by the company. Presently, DDT is paid by the companies before paying the dividend to their shareholders. That is why, it made dividend received by the shareholders of the company of tax-free in their hands.

The dividends distributed by companies & mutual funds on or after 1 April 2020 are taxable income of the investor. A deduction is allowed for interest expense incurred against the dividend and the deduction should not more than 20% of the dividend income received.

The Budget 2020 also imposes a TDS on dividend income distribution by companies or mutual funds. 10% TDS applies to the dividend income distribution per investor. However, there is no TDS applicable if the dividend receipt from a company or mutual fund does not exceed Rs 5,000 annually. The rate of TDS stands reduced to 7.5% for dividends paid till 31 March 2021- For the FY2020-21

Those taxpayers whose gross annual income is below the basic exemption limit of Rs 2,50,000 & senior citizens whose tax payable is zero can claim dividend income without TDS. Sr. citizens should submit a form named as Form 15H to the company or mutual fund declaring the dividend. Other taxpayers who are below 60 years of age should submit a form i.e. Form 15G to claim exemption from TDS.

For Resident Shareholders

However, Indian Finance Act 2020 has abolished Dividend Distribution Tax and, with effect from April 1, 2020, dividends declared by Indian companies would be taxable in the hands of shareholders. For resident shareholders, dividends would be taxed in their hands based on tax rates they are governed with. Companies will have to deduct or withhold tax at 10 percent for dividends paid to these resident shareholders.

For Non-resident Shareholders

For non-resident shareholders—foreign shareholders, portfolio & institutional investors and even individuals (including NRIs)—the said dividend would be taxable in India either at the rates prescribed under the Indian tax laws or relevant tax treaties, whichever is beneficial to the taxpayer. As per the current law, a tax rate of 20 % (plus applicable surcharge and cess) is provided under the Indian tax laws or relevant tax treaties, whichever is profitable to the taxpayer.

As per the current law, a tax rate of 20 % (plus applicable surcharge and cess) is provided under the Indian local laws for dividends paid to non-residents or foreign companies. However, the tax treaties provide for lower rates, in the 5-25 % range, depending on the shareholding percentage and country of the investor.

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