Almost all incomes are taxable in India if it is not specifically exempted from tax or specific deductions under different sections of the Income tax act are not available. Dividend income which you receive by investing your hard earned money in equity shares of a listed company or mutual fund schemes are taxable in India.
In this article, let’s understand the implication of tax on dividend income. You will also know when tax is deducted (TDS) out of your dividend income.
What is dividend income?
Dividends are one way in which a company shares its earnings with the shareholders out of income from running the business.
In simpler terms, a dividend is a cash payment from a company’s profits that the management decided to pay to their shareholders. These are paid either annually or more commonly, on a quarterly basis, based on how the management wants to distribute it.
In general, a company with stable growth generating higher profits pays dividends every year.
In the income tax act, we have section 2(22), which defines dividend to include distribution of accumulated profits to shareholders entailing release of the company’s assets. It also includes distribution of debentures or deposit certificates and other things out of accumulated profits.
In the case of a closely held company, loan or advances to shareholders out of accumulated profit will also be considered as dividend.
Now let us understand how dividend income for investing in equity shares of a listed company and mutual funds is taxed in India.
Tax on dividend income for investing in Indian stock market and mutual funds
Dividend income will be taxable in India in the hands of the investor irrespective of the amount received.
Dividend income is taxable under two different heads.
If you are a trader, which means your main business is buying and selling of stocks in the Indian stock market, then the income earned by you from the trading activities will be taxable under the heading “profits and gains of business or profession”. Therefore, dividends earned from these shares which are held for trading purposes shall also be taxable under the heading “profits and gains from the business or profession”.
Whereas, if it is purely for investment purpose, then dividend income shall be taxable under the head income from other sources.
In general, salaried individuals and a self-employed person prefer to invest in shares of a listed company or mutual funds instead of trading as a business, therefore, dividend income in their case will always be taxable under the heading “income from other sources”.
When it’s taxable under the head profits and gains from business or profession, you can claim the deductions for all expenses incurred by you to earn the dividend income which includes interest on loan, collection charges, etc.
In case the dividend is taxable under the head income from other sources, you can claim interest expenditure incurred to earn that dividend income up to 20% of the total dividend income as deduction. No other deductions are allowed.
As dividend income gets added either to business income or taxed under the head of other sources, you as a resident individual are taxable at the rate of normal tax rates applicable to you based on your taxable income.
You can either opt for a new tax regime or old tax regime as per your wish to reduce your tax liability.
Non resident individuals and foreign portfolio investors are taxed either at the rate of 10% or 20% based on the nature of the dividend.
When dividend income is taxable?
We have two types of dividend received from listed companies and mutual funds.
One is the final dividend which is received at the end of the financial year. The other one is an interim dividend declared every quarter by a listed company.
Final dividend including the deemed dividend is taxable in the financial year in which it is declared, distributed or paid by the listed company or mutual funds, whichever is earlier.
In the case of interim dividend, it will be taxable in the financial year in which it is unconditionally available to its shareholder. Which means, interim dividend is taxable only when it’s received by the shareholder.
When tax is deducted on dividend income-TDS
As per the provisions of section 194K of the Income tax act, 1961, an Indian company must deduct tax at the rate of 10% from dividend distributed to the resident shareholders when the aggregate amount of dividend distributed or paid exceeds 5,000 rupees during the financial year.
For the financial year 2023-24 (assessment year 2024-25), if the dividend distributed or paid by a company exceeds 5,000 rupees, then tax will be deducted out of it. You can take credit for the tax while filing your income tax return.
You can see your dividend income and tax deducted out of it in your AIS and form-26AS.
You can avoid TDS on dividend income by filing form 15G or form 15H with the dividend paying company or mutual fund. Read this article to learn how.
While filing your income tax return, you need to make sure that the dividend income and tax deducted out of it has been included in your ITR.
In case of any mismatch your income tax return can be considered as defective return. If defects are not rectified within the time limit allowed, then it can be considered as a invalid return, which means it will be treated as the income tax return has not been filed.
If the dividend is payable to a non-resident or a foreign company, then tax has to be deducted according to section 195 of the Income tax act, 1961.
Tax should not be deducted from the dividend paid or payable to LIC, GIC or any other insurer.