Dividend income is an important source of passive income for many investors in India. However, the tax treatment of dividend income can be complex. If you invest in shares or mutual funds and receive dividends, you must understand how this income is taxed, how to minimize your tax liability, and how to properly report it when filing your Income Tax Return (ITR).
This article provides a detailed breakdown of how dividend income is taxed, when Tax Deducted at Source (TDS) applies, and strategies to reduce the tax burden on your dividend income.
What is Dividend Income?
In simple terms, a dividend is a portion of a company’s profits that is distributed to its shareholders. When you own shares in a company or units in a mutual fund, you are entitled to receive dividends from the company’s profits, which may be distributed to you periodically.
Types of Dividends
- Final Dividend: This is paid at the end of the financial year, after the company’s annual general meeting (AGM), and is based on the company’s overall financial performance.
- Interim Dividend: This is paid at regular intervals during the year, often on a quarterly basis, and is declared before the company’s AGM.
Companies with stable earnings often pay dividends regularly, while others may choose to reinvest profits back into the business instead of paying out dividends.
How is Dividend Income Taxed in India?
The tax on dividend income depends on the nature of your investment:
- Investment for Business Purposes: If you are a trader (i.e., you buy and sell stocks frequently as part of your business), your dividend income will be treated as business income. In such cases, your dividend income will be taxed under the heading “profits and gains of business or profession.”
- Investment for Personal Purposes: Most individual investors, such as salaried employees or self-employed individuals, buy shares or mutual funds as part of their investment portfolio. For these investors, dividend income is taxed under the heading “income from other sources.”
In both cases, dividend income is added to your overall taxable income, and you will be taxed according to the income tax slab rates applicable to your total income.
You can choose between the old tax regime (with deductions and exemptions) or the new tax regime (with reduced tax rates but no deductions) to reduce your overall tax liability.
Tax Rate for Non-Residents
For Non-Resident Indians (NRIs) or foreign investors receiving dividends from Indian companies or mutual funds, the TDS rate is typically 20% under Section 195 of the Income Tax Act. However, if a Double Taxation Avoidance Agreement (DTAA) exists between India and the country of residence of the NRI, the TDS rate may be reduced.
When is Dividend Income Taxable?
There are two primary types of dividends you might receive:
- Final Dividend: This is the dividend paid at the end of the financial year, based on the company’s performance. Final dividends are taxable in the financial year when they are declared, distributed, or paid, whichever occurs first.
- Interim Dividend: This is paid periodically, often every quarter. The tax on interim dividends is applicable in the financial year when they are actually received by the shareholder.
For instance:
- If a company declares a final dividend in March 2024, it will be taxable in the financial year 2023-24.
- If a company pays an interim dividend in December 2023, it will be taxable in the financial year 2023-24, as that is when the payment is received.
Tax Deducted at Source (TDS) on Dividend Income
Tax Deducted at Source (TDS) is a mechanism where the company or mutual fund deducts tax from your dividend income before paying it to you. The tax is deducted at a prescribed rate and submitted to the government on your behalf.
Under Section 194K of the Income Tax Act, TDS on dividend income is deducted at 10% if the dividend income from a particular company or mutual fund exceeds ₹5,000 during the financial year.
Key Points on TDS:
- TDS Rate: The standard TDS rate on dividends is 10% if your total dividend income from a particular company exceeds ₹5,000.
- Threshold Amount: The ₹5,000 threshold applies separately to each company or mutual fund. For example, if you receive ₹4,500 from one company and ₹6,000 from another, TDS will only be deducted on the ₹6,000 from the second company.
- TDS on NRIs: For non-resident investors, the TDS rate is typically 20%, but it may be reduced if a DTAA exists between India and the investor’s country of residence.
How to Avoid TDS?
You can avoid TDS on dividend income by submitting Form 15G (for residents under 60 years of age) or Form 15H (for senior citizens) to the company or mutual fund paying the dividend. These forms indicate that your income is below the taxable limit, and therefore, TDS should not be deducted.
How to Report Dividend Income in Your Income Tax Return (ITR)
When filing your ITR, it’s essential to report your dividend income correctly to avoid penalties. Here’s how to report dividend income:
- Report Gross Amount: Ensure that you report the gross amount of dividend income you received during the financial year before any TDS deductions.
- TDS Credit: If TDS has been deducted from your dividends, make sure to report it as a tax credit in your ITR. This will help ensure that the tax deducted is accounted for and adjusted against your total tax liability.
You can find details of your dividend income and TDS deducted in your Annual Information Statement (AIS) and Form 26AS.
How to Reduce Tax on Dividend Income
There are ways to minimize the tax burden on your dividend income under the Income Tax Act.
One way to reduce your tax liability is by claiming a deduction for interest expenses incurred to borrow funds for investing in shares or mutual funds. According to Section 57 of the Income Tax Act, you can claim interest expenses as a deduction from your dividend income, subject to certain conditions.
- Eligible Expenses: Only interest expenses on loans taken specifically for investing in shares or mutual funds are eligible.
- Limit on Deductions: The maximum deduction you can claim is 20% of the total dividend income.
For example:
- If you take a loan of ₹25,000 to invest in shares and earn ₹10,000 in dividends, and pay ₹2,500 in interest, you can only claim ₹2,000 (which is 20% of ₹10,000) as a deduction.
Note: You cannot deduct other expenses such as brokerage fees or administrative costs related to managing your investments.
Tax on Dividend Income for Non-Resident Indians (NRIs)
For Non-Resident Indians (NRIs), dividend income is subject to TDS under Section 195 of the Income Tax Act at a rate of 20%. However, the rate may be lower if there is a Double Taxation Avoidance Agreement (DTAA) between India and the NRI’s country of residence.
Required Documents for NRIs
To avail of a reduced TDS rate under the DTAA, NRIs must submit the following documents:
- Form 10F (providing details of tax residency)
- Tax Residency Certificate (from the NRI’s country of residence)
- Declaration of Beneficial Ownership
If these documents are not submitted, the higher TDS rate will apply. However, NRIs can claim a refund of the excess TDS deducted by filing their ITR in India.
Conclusion
Tax on dividend income in India is a crucial aspect for investors, and understanding the various tax rules is essential for minimizing your tax liability. By correctly reporting your dividend income in your ITR, filing the necessary forms to avoid TDS, and utilizing the deductions available for interest expenses, you can reduce the tax burden on your investments.
If you are a Non-Resident Indian (NRI), make sure to submit the required documents to avail of the benefits under the Double Taxation Avoidance Agreement (DTAA) to reduce TDS.By following these strategies, you can make the most of your dividend income while staying compliant with Indian tax laws.
