As taxpayers, comprehending the management of dividend income for tax purposes can be challenging. You might ask if taxes are due on such income and how recent tax law changes impact it. This guide provides a detailed look at dividend income taxation, comparing past and present regulations, and examining implications for domestic and international dividends.

Overview of Dividend Income Taxation

Dividend income is a share of a company’s profits distributed to shareholders. Traditionally, the Dividend Distribution Tax (DDT) was levied on the distributing entity, like companies or mutual funds. However, the Finance Act, 2020 changed this by moving the tax burden to individual investors.

Transition from Old to New Tax Regulations

Until April 1, 2020, dividends from Indian companies were tax-exempt for recipients because companies paid DDT before distribution. Post the Finance Act, 2020, DDT was abolished and dividends became taxable for shareholders, based on their income tax slabs. Furthermore, the 10% additional tax on dividends over Rs. 10 lakh, under Section 115BBDA, was removed for residents, HUFs, and firms.

Tax Deducted at Source (TDS) on Dividend Income

Under the new rules, TDS is applicable to dividends from April 1, 2020. The typical TDS rate for dividends above Rs. 5,000 is 10%, temporarily reduced to 7.5% due to COVID-19, until March 31, 2021. For example, if Mr. Ravi received Rs. 6,000 in dividends on June 15, 2023, a 10% TDS (Rs. 600) will be deducted, creditable against his total tax liability upon ITR filing for 2023-24 (Assessment Year 2024-25).

Non-residents face a 20% TDS unless a Double Taxation Avoidance Agreement (DTAA) specifies a lower rate. Required documents—Form 10F, beneficial ownership declaration, and tax residency certificate—must be submitted to claim lower TDS rates. Absence of these documents leads to higher TDS, reclaimable during ITR filing.

Deductions Against Dividend Income

The Finance Act, 2020 allows interest expense deductions incurred for dividend income, capped at 20% of the dividend received. Other expenses, such as commissions, cannot be deducted. For instance, if Mr. Ravi borrowed funds, paying Rs. 2,700 in interest in 2023-24, he can deduct up to Rs. 1,200 (20% of Rs. 6,000) against his dividend income.

Submission of Form 15G/15H

Residents with total estimated income below the exemption limit can submit Form 15G, and senior citizens with nil tax can submit Form 15H, to avoid TDS. Companies must notify shareholders about dividends via email, and form submission allows eligible shareholders to receive dividends without TDS.

Advance Tax on Dividend Income

Advance tax provisions apply if a taxpayer’s total tax liability, including dividends, is Rs. 10,000 or more. Timely payment of advance tax prevents interest and penalties for non-payment or short payment.

Taxation of Dividends from Foreign Companies

Foreign company dividends fall under "income from other sources" and are taxed per applicable income slabs. Taxpayers in the 30% bracket, for instance, face the same rate on such income, plus cess. Interest expense deductions related to foreign dividends are also capped at 20% of gross dividend income. TDS under Section 194 is mandatory, 10% for resident Indians on dividends exceeding Rs. 5,000, rising to 20% without a PAN.

Relief from Double Taxation

Foreign dividends might face dual taxation in India and abroad. Relief under DTAA or Section 91 ensures no duplicate tax payment on the same income.

Conclusion

Grasping dividend income taxation is vital for financial planning and compliance. The 2020 tax shift places dividend tax responsibilities on investors, requiring TDS inclusion in total taxable income. For foreign dividends, extra considerations include double taxation relief and necessary documentation for reduced TDS rates. Awareness of these provisions helps taxpayers manage dividend income and enhance tax efficiency.