All You Need To Know About New Taxability Of Dividend Income

As a taxpayer, you should be well aware of the tax on dividends. But if you are not, do not worry. We have got you covered! The dividend income taxability was tax-exempt under the hands of the shareholder. This was so because the respective firms had already paid dividend distribution tax. Since 1st April 2020, this exemption has been removed.

The Finance Act 2020 has moved the responsibility of paying tax on dividend to the hands of the shareholders. Now, the treatment will depend on the shareholder. Let’s say you are a trader and have received a dividend on a particular share. It should be shown under “Income from business or profession”. But, if you are an investor, the dividend received should be shown under “Income from other sources.”

Types Of Dividends

Before we dive deep into the taxability of dividend income, let us understand the classification of dividend income:

1. Based On Time

• Interim Dividend
• Final Dividend.

2. Based On Source

• Received from investment in shares of a domestic company
• Received from investment in shares of a foreign company
• Received from investment in equity mutual funds
• Received from investment in debt mutual funds

Tax Deducted At Source (TDS) On Dividend Income 

The tax on dividends is due from investors now. The Finance Act 2020 has levied TDS on investors’ dividend income from their money invested in firms or mutual funds. If you have a dividend income of more than Rs. 5,000, the TDS payable will be 10%. This tax paid will be taken as a credit from your ITR filing from your total tax liability. 

For example, you got a total of Rs. 7,000 as dividend income from the firm. Now, you will have to pay a 10% tax on dividends. But, this will not be deducted during your ITR filing. The company will deduct Rs. 700 (10% of Rs. 7,000) from your total dividend, and you will get Rs. 6,300. 

For NRIs, the tax deducted at the source rate is 20%, which depends on the double taxation avoidance agreement (DTAA). If the NRI wants to avail of the tax rate deduction due to their country’s treaty rate, they have to submit documents such as Form 10F, a tax residency certificate and so on. If these documents are not submitted, there will be no deduction in the tax rate. 

When Is Tax On Dividend Income Charged? 

The final dividend is taxable in the year in which the firm gave it. In the case of interim dividends, the tax is reduced on a receipt basis. 

Expenses Deducted From Dividend Income 

This is divided into two categories:

• When The Dividend Income Is Treated As Business Income: The taxpayer recognises the dividend as an income from a business or profession. They can make deductions from expenses that they incurred to earn this income. These expenses could be loan interest, collection charges and so on. 
• When The Dividend Income Is Treated As Income From Other Sources: The taxpayer recognises the dividend income as income from other sources. They can only make deductions of interest expense that they incurred to earn this dividend. It can only be deducted up to 20% of the total dividend earned. No other expense can be deducted. 

When Does A Resident Have To Submit Form 15G Or 15H?

If a resident’s annual income is below the exemption limit, they will have to submit Form 15G. This must be given to the company or the mutual fund that is paying them a dividend. In the case of a senior citizen whose taxable payable is zero, Form 15H is to be given to the firm or mutual fund. 

The dividend declaration is given via mail by the firm or mutual fund. They need Form 15G or 15H from the firm to pay them dividends without tax deducting. 

Advance Tax Levied On Dividend Income 

Assume your total tax liability exceeds Rs.10,000 in a financial year. Advance tax provisions will apply to you for that respective financial year. If you do not pay the advance tax or pay short of the total amount, you will be charged interest and a penalty.

Tax On Dividend From Foreign Countries

Tax on dividends from foreign countries will come under the head “Income from other sources.” This income will be taxed at the tax slab under which the taxpayer falls. So, if you fall under the tax slab of 30%, foreign countries’ dividend tax will be deducted at the same rate. You will only be allowed to deduct up to 20% of your dividend income as interest expense. 

If you do not submit your PAN card, the firm giving out a dividend will cut tax on dividends at a rate of 20%. 

Relief From Double Tax On Dividends 

Assume you receive dividend income from shares of a foreign company. This dividend tax is deducted in the foreign company’s home country. The same happens in India. On this, you can claim relief from the double tax paid. The double taxation avoidance agreement can receive this relief. This is possible if the Government of India is present in a foreign company’s home country. It can also be done through Section 91 in the absence of such agreements. 

Final Words 

Taxpayers should always be aware of their tax liability. The Government brought down the payable tax rate on dividend to 7.5%. This happened during the pandemic. This article should help you know more about the tax on dividend. It will help you understand the new laws regarding the taxability of dividend income. Like this article? Visit Piramal Finance to read more such ones.