How TDS on Dividend Income Works in India: A Simple Guide

A dividend is cash or stock that a company pays to its owners from its earnings. This income is taxable in India. Under Section 194 of the Income Tax Act, 1961, tax is deducted at the source (TDS) when dividends are paid to shareholders. 

Under the Income Tax Act, 1961, any person (resident or non-resident) receiving dividends from a company is subject to Tax Deducted at Source (TDS). TDS is the tax that the government takes from your income when you receive the payment.

In India, Tax Deducted at Source (TDS) on dividend income is applicable under the provisions of the Income Tax Act, 1961.

Dividend income is taxable in the hands of the shareholder.

TDS Rates on Dividend Income

The TDS rate on dividend income is 10% if the dividend paid is more than ₹5,000 in a financial year.

For resident individuals, the threshold for TDS is ₹5,000 per financial year. If your dividend income exceeds this limit, the TDS will be deducted.

For Example if you receive ₹15,000 as dividend from a company, the TDS will be ₹15,000 × 10% = ₹1,500. The company will deduct ₹1,500 as TDS and pay the remaining ₹13,500 to you.

If you do not provide your Permanent Account Number (PAN) to the company, the TDS rate is increased to 20%. Even if your dividend income is below ₹5,000, the company will still deduct TDS at 20% if PAN is missing.

TDS on Dividend Income for Non-Residents

For non-resident Indians (NRIs) or people living abroad, the tax rate on dividend income is 20% (plus any extra charges) on the total dividend amount. This rate can be lower if there is an agreement between India and the person’s home country to avoid double taxation.

In addition to the main tax rate for non-residents, there are extra charges:

• A Health and Education Cess of 4% on the tax amount.
• A surcharge based on income level, added to the main tax.

For example, if the tax is ₹1,500, the 4% cess would be ₹60 (1,500 × 4% = 60). So, the total tax would be ₹1,560.

Key Points to Remember

TDS on dividend income is deducted at the time the dividend is paid.

The TDS deduction is applicable only if the dividend income exceeds ₹5,000 in a financial year. If your total dividend income is below ₹5,000 in a financial year, no TDS will be deducted, even if the dividends are paid out by multiple companies. However, you still need to declare this income in your Income Tax Return (ITR).

Tax Credit for TDS

The TDS amount deducted by the company is available as a tax credit for the shareholder. You can claim this in your Income Tax Return (ITR).

You can verify the TDS amount through Form 26AS, which shows all TDS amounts deducted against your PAN.

Example

If you receive ₹10,000 as dividend from a company, the TDS would be:

• ₹10,000 × 10% = ₹1,000 (TDS amount).
• You would receive ₹9,000 after TDS deduction.

If your total dividend income in the year is below ₹5,000, no TDS will be deducted, but you still need to report it in your ITR.

TDS Process on Dividend Payments

When a company distributes dividends, it is responsible for deducting the TDS at the time of payment and remitting it to the government. Here’s how the process works:

• The company announces the dividend.
• The dividend is paid to the shareholders, and if it exceeds ₹5,000 in total, TDS is deducted at the prescribed rate.
• The TDS is deducted at source and remitted to the government.
• The company issues a TDS certificate (Form 16A) to the shareholder, showing the amount of tax deducted.
• The shareholder can claim this TDS as a tax credit while filing their Income Tax Return (ITR). If the total tax payable is less than the TDS already deducted, the excess TDS will be refunded.

How to Claim the TDS Credit

The TDS deducted on dividends will be reflected in Form 26AS, which is a consolidated statement of all taxes deducted and deposited on behalf of a taxpayer.

You can claim this TDS amount as a credit while filing your Income Tax Return (ITR).

If your total tax payable is lower than the TDS deducted, you will be entitled to a refund of the excess amount.

If your tax payable is higher than the TDS, you will need to pay the balance tax to the government.

Tax on Dividend Income for Senior Citizens and Others

For senior citizens (above 60 years), there is no specific relaxation regarding TDS on dividend income. They are subject to the same TDS rules as other individuals.

For any shareholder with a lower income or those who are not liable to pay tax, it may be beneficial to submit a Form 15G/15H to the company (depending on age) to avoid TDS deduction, provided their total income is below the taxable threshold.

Form 15G: This form can be submitted by a resident individual below 60 years, stating that their total income is below the taxable limit.

Form 15H: This form is applicable for senior citizens above 60 years.

By submitting these forms, shareholders can ensure that no TDS is deducted if they fall below the taxable income threshold.

Example Scenario

Let’s go through a simplified example to understand how TDS works on dividend income:

Scenario 1:

• You are a resident individual.
• You hold equity shares in two companies.
• Company A pays you a dividend of ₹7,000.
• Company B pays you a dividend of ₹3,000.
• Total dividend income in the financial year = ₹7,000 + ₹3,000 = ₹10,000.
• Since your total dividend income exceeds ₹5,000, TDS will be applicable on the dividends received from both companies.

TDS Calculation:

• Company A: ₹7,000 × 10% = ₹700 (TDS).
• Company B: ₹3,000 × 10% = ₹300 (TDS).
• Total TDS: ₹700 + ₹300 = ₹1,000.
• You will receive ₹9,000 from Company A and ₹2,700 from Company B after TDS.

You can claim this ₹1,000 as tax credit while filing your ITR, which will either reduce your tax payable or lead to a refund if no further tax is due.