How Are Dividends Taxable in India?

Dividends are one of the primary sources of income for investors in stocks and mutual funds. While they offer regular returns, it's essential to understand how dividends are taxed in India to ensure accurate tax planning. Over the years, the taxation on dividends has undergone significant changes. Let's break down how dividends are taxed, the impact of the Finance Act, and the exemptions that may apply.

Taxation of Dividends: Key Changes Under Finance Act

The taxation of dividends in India has evolved, and recent changes have simplified the system. Historically, dividends were subject to a Dividend Distribution Tax (DDT) paid by the company. However, from April 1, 2020, the DDT was abolished, and dividends are now taxed in the hands of the shareholders. This means that tax liability on dividends depends on the amount received by the investor and their income tax slab.

How Dividends Are Taxed for Resident Shareholders

1. Taxable in the Hands of the Shareholder:

   • Dividend Income is now taxable under the head "Income from Other Sources".

   • The rate of tax depends on the amount of dividend income and the individual's income tax slab.

2. Tax Rate for Dividends:

   • Up to ₹10 lakh: Dividend income up to ₹10 lakh in a financial year is taxed at 10%.

   • Above ₹10 lakh: Dividend income exceeding ₹10 lakh in a financial year is taxed at 10%, along with additional tax of 15% on the income above ₹10 lakh.

3. Tax-Free Dividends:

   • If the dividend received is less than ₹5,000 in a financial year, it may not be subject to tax under Section 10(34).

   • This means that small dividend income (say from a few stocks) may not be taxed if the total dividend received during the year doesn’t cross the ₹5,000 threshold.

4. Dividend Income Exempt under Section 10(34):

   • Dividends up to ₹10 lakh, for resident individuals, are exempt from tax if they are received from a domestic company or mutual fund. However, any dividend above this threshold is taxed as per your income tax slab.

Taxation of Dividends for Non-Resident Indians (NRIs)

For Non-Resident Indians (NRIs), the taxation of dividends is slightly different. NRIs are still taxed on dividends received from Indian companies, but they do not have the benefit of the tax exemptions available to resident Indians.

1. Tax Rate for NRIs:

   • Dividends received by NRIs from Indian companies are subject to tax at a flat rate of 20% (plus surcharge and cess).

   • This is withholding tax, which means the tax is deducted at the source by the company paying the dividend.

2. Tax Credit under DTAA:

   • If the NRI resides in a country with which India has a Double Taxation Avoidance Agreement (DTAA), they can claim a tax credit for the tax already paid in India when filing their tax returns in their country of residence.

Tax Deducted at Source (TDS) on Dividends

The company distributing dividends is responsible for deducting TDS before distributing the dividend. The TDS rates on dividends depend on the recipient’s status (whether they are a resident or non-resident) and the amount of dividend paid.

1. TDS Rate for Residents:

   • The TDS rate on dividends paid by Indian companies to residents is 10% if the dividend paid exceeds ₹5,000 during the financial year.

   • However, no TDS is deducted if the dividend amount is below ₹5,000.

2. TDS Rate for Non-Residents (NRIs):

   • The TDS rate for NRIs is 20% on the gross dividend amount.

   • Tax treaties may reduce this rate further, and the NRI can claim the reduced rate by submitting a Tax Residency Certificate (TRC).

Claiming Refund of TDS on Dividends

1. For Resident Indians:

   • If TDS has been deducted at a higher rate than the applicable rate for a resident individual, they can claim a refund by filing their income tax return (ITR).

2. For Non-Resident Indians (NRIs):

   • NRIs can also claim a refund of TDS on dividends if the tax deducted exceeds their actual tax liability.

   • They may need to provide documentation like a Tax Residency Certificate (TRC) to claim the lower tax rates under the Double Taxation Avoidance Agreement (DTAA).

Dividend Income and its Impact on Taxable Income

Dividend income is added to your total taxable income and is taxed according to your applicable tax slab. Here’s a breakdown of how it can affect your taxes:

1. Impact of Dividend on Total Taxable Income:

   • If you are already in a higher tax bracket, the dividend income will increase your taxable income, potentially pushing you into a higher tax bracket.

   • However, if the dividend amount is relatively small, it may not have a significant impact on your overall tax bill.

2. Dividend Income and Deduction under Section 80C:

   • Dividends received from stocks, mutual funds, or other equity instruments do not qualify for tax deductions under Section 80C.

Conclusion

Understanding the taxation of dividends is crucial for investors looking to optimize their investment income. While dividends provide a steady income stream, it’s important to note the impact of taxes on this income. For residents, the tax rates on dividends are straightforward, with a 10% tax applicable on dividend income above ₹5,000. For NRIs, dividend income is subject to 20% TDS, but they may be able to reduce this through the DTAA.

To ensure you comply with the tax regulations, always keep track of the dividends received and report them accurately while filing your income tax return. By doing so, you can avoid penalties and ensure that your taxes are paid correctly.

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