Is Dividend Income Taxable? A complete guide to Taxation on Dividend Income.
A jurisdiction imposes a dividend income tax on dividends paid by a corporation to its stockholders. The primary tax liability belongs to the stockholder. By designating the organisation to the sole financial investors, Finance Act 2020 relocated the taxability on dividend income from the hands of the dividend.
Here we will be discussing old and new tax provisions related to dividend income and its tax implications.
Difference between Old and New provision for taxability of dividend income
The dividend income from a domestic company was exempted in the hands of shareholders till the assessment year 2020-21. The company was responsible for paying dividend distribution tax (DDT). The finance act, 2020 made provisions ineffective which means that the domestic companies are not liable to pay DDT on such dividends.
As a result, starting in AY 2021-22, the burden of tax payment will be shifted from the firm to the shareholders, and dividend income will be taxable in their hands. The DDT liability on mutual funds or companies remains withdrawn.
Tax Deducted at Source (TDS) on dividend income.
The main aim of TDS is to collect tax from the ultimate source of income. TDS will be applied on dividend distribution by mutual funds or enterprises on or after April 1, 2020, according to the Finance Act 2020.
TDS is deducted at a rate of 10% on dividend income of more than Rs 5,000 from any mutual fund or corporation. While filing ITR, the deducted tax will be available as a credit from the taxpayer's total tax liability. TDS shall be deducted at a rate of 20% for non-residential properties, subject to the DTAA (double taxation avoidance agreement).
Documentary proofs such as Form 10F, certificate of tax residency, declaration of beneficial ownership, etc., have to be submitted by the non-resident to benefit from the lower deduction. If the non-resident fails to produce these documents, TDS will be deducted at a higher rate, which will be claimed when the ITR is filed.
Deduction of expenses from dividend income
The Finance Act of 2020 rendered provisions ineffective, implying that domestic corporations are not
required to pay DDT on such payouts. It is not entitled to a deduction for any other expenses involved in producing the dividend income, such as salary or commission expenses.
Suppose dividend income is assessed to tax as 'Business Income'.In that situation, the assessee can deduct any expenses related to earning the dividend income, such as collection fees, interest on a loan, and so on. There is no restriction on the number of deductions claimed in this case.
Advance tax on dividend income
Advance tax is payable by people who have sources of income other than their salary. It covers capital gains from stocks, rent, lottery prizes, and fixed deposits, among other things. In a particular financial year, if the taxpayer's total tax liability is equal to or more than Rs.10,000, then advance tax provisions apply. Penalty and interest are levied in case of short payment or non-payment of the advance tax liability.
Pay as you earn is another name for advance tax. This tax is supposed to be paid in the same year the income was received.
Submission of form 15G/15H
Form 15H and 15G are self-declaration forms. Individuals can submit to the mutual funds or companies requesting them not to deduct tax at source (TDS) on interest income as their income is less than the basic dividend income tax exemption limit.
A senior resident whose assessed annual tax payable is nil must submit Form 15H to the organization paying the dividend. Form 15G can be submitted to the mutual fund or firm receiving the dividend by a resident individual whose anticipated annual income is less than the exemption level.
The dividend declaration will be sent to the stockholder's registered email address, and the stockholder must submit form 15G or form 15H to collect dividend income without TDS.
Dividend received from a foreign company.
Dividends received from a foreign company will be charged to tax under "income from other sources" in the hands of an Indian resident. Dividends received from any foreign company shall be included in the taxpayer's total income and charged to tax at the rates applicable to the taxpayer. Only dividends received from an Indian company are exempt from dividend income tax.
For example, if the taxpayer comes in at a 25% tax slab rate, such dividend shall also be taxable at 25%. In the case of a foreign dividend, the investor is allowed to claim deduction only for the interest expense restricted to 20% of the gross dividend income.
Relief from double taxation
If an Indian resident receives a dividend from a foreign firm that had already been taxed. The taxpayer should think about the income tax laws as well as the rules of the Double Taxation
Avoidance Agreement (DTAA) with that country.
Suppose any dividend received from a foreign company has experienced the burden of double taxation. In that case, the taxpayer can claim double taxation relief according to the Double Taxation Avoidance Agreement requirements. According to this, the taxpayer doesn't have to pay tax on the same income twice.
Hence, the company declaring the dividend should deduct TDS according to section 194 of the income-tax Act, 1961. 10% TDS is applicable for an individual for dividend income above Rs.5000. The domestic company will deduct TDS at 20% if the PAN of the resident stockholder is not available.
What is DDT?
- Dividend distribution tax (DDT) is a tax placed on dividends paid out of a company's profits to its stockholders. The dividend distribution tax is deducted at the time of the distribution and is taxable at the source. Domestic companies that are distributing dividends are supposed to pay DDT at the rate of 15%.
In which year is the dividend taxable?
- According to the income tax act of India, dividends paid/distributed by any company on or after 1 April 2020 are taxable in the hands of the stockholders.