Understanding the Taxability of Dividend Income in India

Dividends have long been a source of passive income for investors. However, the tax implications surrounding this form of income have changed over the years. With these changes, the taxability of dividend income has become a topic of keen interest among investors in India. This blog aims to demystify the tax on dividend income, shed light on the associated TDS, and provide a comprehensive understanding of the prevailing tax rates.

What is Dividend Income?

Before diving into the tax implications, it's essential to understand the concept of dividend income. When a company earns a profit, it can either reinvest these profits (retained earnings) or distribute a part of it to its shareholders. This distributed part of the profit is termed as "dividend income." Essentially, it's a return on the investment made by shareholders in the company's equity.

Taxability of Dividend Income: A Historical Perspective

Historically, until FY 2019-20, dividends were tax-free in the hands of the recipients (shareholders) as companies paid a Dividend Distribution Tax (DDT) before disbursing dividends. However, the system was revamped in the Union Budget 2020. From FY 2020-21 onwards, dividends are now taxable in the hands of the shareholders, and companies are no longer required to pay the DDT.

Tax Rates on Dividend Income

The tax on dividend income is now levied at the slab rates applicable to an individual's income. To clarify:

1. For Individual/HUF Taxpayers: The dividend income is added to your total income and taxed at your slab rate.

2. For NRIs: The tax rate is a flat 20% (plus applicable surcharge and cess) on dividend income. However, the rate might vary depending on the Double Taxation Avoidance Agreement (DTAA) between India and the resident country of the NRI.

3. For Domestic Companies: Dividend income is taxed at the prevailing corporate tax rate.

TDS on Dividend Income

With dividends now taxable in the hands of shareholders, there's a mechanism in place to deduct tax at source:

1. TDS Rate: TDS on dividend income for resident individuals is 10% if the dividend amount exceeds INR 5,000 in a financial year.

2. For NRIs: TDS is deducted at 20% plus applicable surcharge and cess. The rate may vary as per DTAA.

3. No TDS in Certain Cases: If the dividend is paid by a company on shares listed on a recognised stock exchange, and the transaction is liable to securities transaction tax (STT), no TDS is required to be deducted. Moreover, if a person’s income is less than INR 2.5 lakhs (including the dividend income), it’s not taxable.

Exemption and Relief

While dividend income is now taxable, there's relief for those who earn dividends from shares or mutual funds:

1. Dividends up to INR 5,000: No TDS is deducted if the total dividend income in a financial year is up to INR 5,000.

2. DTAA Benefit: NRIs can claim benefits under the DTAA, which can provide a lower TDS rate than the standard 20%.

Reporting Dividend Income

When filing Income Tax Returns (ITR), you should:

1. Include Dividend Income: Ensure you report dividend income under the head "Income from Other Sources."

2. Claim TDS: If any TDS has been deducted from your dividend income, ensure you claim this amount in your ITR. This can be verified from Form 26AS, which reflects TDS details.

Conclusion

The taxability of dividend income has brought about a paradigm shift in the approach of individual investors and companies alike. While earlier, dividends were a tax-free source of income for shareholders, now they need to factor in the tax implications.

Being informed about the tax rates on dividend income, the nuances of TDS on dividend income, and the overall taxability can help investors make informed decisions. As always, it's wise to consult with a tax consultant or financial advisor to navigate the complexities and ensure compliance.