Dividend: Taxation of Dividend Income For The FY 2023-24

Introduction

Dividend is an income we get from the capital investment from shares or mutual funds. From the company’s point of view, it is the distribution of profits to its owners.

This income earlier in India received by investors from shares or mutual funds was not taxable in their hands. Dividends exceeding ₹10 lakh in a year are subject to taxation for the investors. This was covered under the now-removed sections 10(34) and 115BBDA. Furthermore, companies were paying a Dividend Distribution Tax (DDT) under Section 115-O. DDT was eliminated by the Finance Act, 2020.

The investors and shareholders from 1st April 2020 are liable to tax on dividend income as applicable slab rates. In the same vein, companies and mutual funds were not require to pay DDT on the distribution of dividends.

Dividend Income

Rates of tax on Dividend Income

Assessee	Dividend Income	Rate of Tax
Resident	Dividend from Domestic Company	As per applicable slab rates to the Assessee
Non-Resident/Foreign Company	Dividend from Bonds of Indian company or GDR acquired in Foreign Currency	10%
Non-Resident/Foreign Company	Dividend Income on shares purchases in Indian/Foreign currency	20%
Non-Resident/Foreign Company	Dividends from units of mutual fund purchased in foreign currency as per Section 10(23FD) or of UTI	20%
Overseas Financial Organisation	Dividends from units of mutual fund purchased in foreign currency as per Section 10(23FD) or of UTI	10%
Foreign Institutional Investor(FII) or Specified Fund	Dividends from Securities Other than Units of UTI & Mutual fund.	FII-20% Specified fund-10%

Taxability of Dividend Income

• Dividend income is taxable under ‘Income from Other Sources’ under section 56(2)(i).
• The term Dividend includes deemed dividend and interim dividend.
• Deduction of expenses from Dividend Income under Section 57 is allowed solely for interest expenses.

Any additional expenses like commission etc are not allowable. The amount of deductions can be avail is the lower of:

1. Actual interest expense, or
2. 20% of Dividend Income

• Dividends from Foreign companies shall be taxable under the head ‘Income from Other Sources’ and tax at applicable rates. The above interest expense deduction under section 57 of a maximum of 20% of the dividend income is available in the case of Dividends from Foreign Companies.
• If shares held for trading purpose of the business objective then –

1. dividend income can treated as ‘Profits or Gains from Business or Profession’.
2. accordingly, all expenses incurred in earning this dividend income are allowable as business expenses.

• Taxpayer can avail relief from Double Taxation under section 91 or as per applicable Double Taxation Avoidance Agreements if tax paid twice i.e. in two countries.

TDS on Dividend Income

• A domestic company is to deduct tax at the rate of 10% on payment of dividends to its resident shareholders when such dividend exceeds ₹ 5,000. If the PAN of the individual is not available a higher rate of 20% of TDS shall be applicable.
• Example: Mr X earned a dividend of ₹ 10,000. An amount of ₹ 9,000 need to be credited to him while the company shall deduct TDS of ₹ 1,000 which shall be available as credit for X while filing of return.
• As for dividends earned by Non-residents, tax is to be deducted at the rate of 20% or lower rates if given in the applicable Double Tax Avoidance Agreements. If the non-resident wants to avail lower rates benefit then – declaration of beneficial ownership, a certificate of tax residency, Form 10F etc, is to be submitted.

Advance Tax on Dividend Income

Advance Tax provisions shall apply to taxpayers having a tax liability of more than ₹ 10,000.

Taxpayers whose tax liability exceeds ₹10,000, including earning from dividends, must comply with Advance Tax provisions.

If failure to pay Advance Tax can result in interest and penalties for the taxpayer.

Submission of Form 15G/H

Taxpayers with projected incomes below the Basic Exemption Limit can submit Form 15G /Form 15H. This form can submit to the dividend-paying company or mutual fund to claim exemption from deducting tax on dividends receivable. Form 15H is for senior citizens and 15G is for others.

Conclusion

Any person earning dividend income has to examine the situation carefully. To ensure that they are complying with all the provisions of the Act.

FAQs