Dividend incomes are taxable in the hands of the investor under the head “income from other sources”. If trading in stocks and mutual funds is your business, then you can take dividend income as your business income.It does not matter whether the dividend is received from a company or a mutual fund.
To know under which head and how dividend income is taxable, you can read our article How your dividend incomes are taxed in India FY 2023-24 (AY 2024-25).
In this article, you will learn the TDS rules on dividend income and how to avoid deduction of tax at source (TDS) on dividend income.
TDS rule on dividend income
Tax will be deducted from your dividend income if the total dividend received from a company or mutual fund exceeds 5,000 rupees for a financial year. Please note, it’s an aggregate amount per company or mutual fund.
TDS rate on dividend income is 10%. If you have not submitted your PAN to the company or mutual fund, then instead of 10%, TDS rate will be 20%. Higher rate of tax @20% will not be applicable as in most cases PAN is collected while opening a demat account or before investing in a mutual fund.
For instance, assume that you as an individual holding 20,000 shares of a listed FMCG company. Dividend declared by the company is 5 rupees per share. You are now eligible to get a dividend of 1,00,000 rupees from that FMCG company. As this amount exceeds the threshold limit of 5,000 rupees per year, the FMCG company will be deducting tax (TDS) at the rate of 10% on 1,00,000 rupees, which comes to 10,000 rupees. Balance 90,000 rupees will be deposited to your bank account.
Rs 10,000 will be deposited with the government against your PAN. If PAN is not given then TDS rate will be 20%.
You can take a credit of Rs 10,000 to your income tax return while filing it with the government. If you are not liable to tax, then a refund can be claimed.
Also Read: Tax deduction at source (TDS) in respect of income from mutual fund – Section 194K
How to avoid tax deduction (TDS) on dividend income
It may happen that in a particular year you might not have enough income to pay taxes or your income is below the basic exemption limit. In this type of situation, individuals like you can face difficulties in filing returns and getting the excess tax deduction as a refund.
As per our tax laws, an individual whose total income for a financial year exceeds basic exemption limit is required to file their income tax return on or before the due date of filing ITR.
Income tax return is required to be filed for every financial year in accordance with the provisions of section 139 of the income tax act, 1961.
If you are an individual getting dividend income in excess of 5,000 rupees for a financial year and your total income does not exceed the basic exemption limit, then you would be required to file your income tax return only to claim refund of the tax deducted on dividend income (TDS).
Basic exemption limit for the financial year 2023-24 depends on the income tax regime you have chosen. For instance, if you have decided to pay tax as per the old tax regime, then the basic exemption limit is 2,50,000 rupees. Instead, if you have decided to pay tax as per the new tax regime under section 115BAC, then the basic exemption limit is 3,00,000.
In order to avoid these kinds of difficulties, the government has introduced provisions into income tax laws.
As per our tax laws, a resident individual who is expecting his/her total income including dividend is to be below the basic exemption limit, can submit a form 15G to the company or mutual fund paying the dividend in excess of 5,000 rupees for a financial year. After getting the form 15G, the company or the mutual fund or both, will not be deducting tax (TDS) from your dividend income.
If you are a senior citizen, then instead of form 15G, you need to submit form 15H to the company or mutual fund. A senior citizen is a person who has attained 60 years of age at any time during the financial year.
If your tax liability is nil but the total income exceeds the basic exemption limit, then you can submit above mentioned forms for not deducting tax from dividend income. However, in this case, you need to submit your income tax return along with the form 15G or 15H, as the case may be.
Please note, these form 15G / 15H forms are valid for a financial year. You need to submit it for every financial year or else tax will be deducted by the company or mutual fund from your dividend income.
NRIs are not allowed to submit form 15G/15H.
You are suggested to submit form 15G or 15H, as the case may be, at the beginning of the financial year to avoid deduction of tax from dividend income.
Here are the conditions one must satisfy before submitting form 15G;
- The individual must be a resident in India.
- Age of the individual must be below 60 years of age during the financial year for which the form is submitted.
- The tax liability on the estimated income including the dividend is nil for the financial year.
Similarly for form 15H, one should satisfy the following conditions before submitting it to the company or mutual fund.
- Age of the individual must be 60 years or above during the financial year.
- Senior citizens must be a resident individual.
- Estimated tax liability for the whole financial year after taking dividend into account must be nil.
If you are taxable as per our tax laws, you can choose the growth option offered by the mutual funds. In the growth fund, instead of paying back profit to investors, these mutual fund companies will reinvest in the business by not paying you any dividend. Therefore, no TDS is applicable to dividend income but your investment will grow based on how your money is invested.
In case tax has been deducted for not submitting form 15G or 15H in time, then you have the option to claim refund while filing your income tax return with the government.
You can also reduce your taxable limit below the basic exemption by taking tax benefits under section 80C to 80U based on your eligibility. You can also try the new tax regime under section 115BAC to reduce your taxable income limit.
Frequently asked questions (FAQs)
I am a senior citizen of india. My dividend income exceeds the basic exemption limit. Can I submit form 15H to avoid tax deduction (TDS) on dividend income?
As a senior citizen, you can submit form 15H to the company or mutual fund even if your estimated dividend income exceeds the basic exemption limit. However, keep in mind that your estimated tax liability for the financial year after taking dividend income into consideration is nil. Which means, you can submit form 15H if your estimated tax liability for the whole financial year is nil.
Basic exemption limit for the financial year 2023-24 (assessment year 2024-25) under the new tax regime is 3,00,000 rupees. Under the old tax regime, the basic exemption limit for a senior citizen is also 3,00,000 rupees. If your age is 80 years or above, then the basic exemption limit is 5,00,000 rupees.
Where can I find my tax deduction (TDS) on dividend income details?
The details of the dividend income and tax deducted from it can be found in form 26AS and in your AIS.
You need to check these two forms before filing income tax return to make sure that all income and tax deducted there from has been included in your ITR.
