Many times I come across taxpayers who are unsure about whether they have to pay tax on dividend income or not. Most of them believe that it is the liability of the Company paying a dividend, to deposit tax on such dividend.
However, Finance Act 2020 has transferred the burden of tax on dividend income from the company declaring the dividend to the investor.
In this post, we'll look at the differences between the old and new tax provisions regarding 'dividend income' and changes in tax provisions.
Changes in Taxation on Dividend Income
Previously, if an investor received a dividend from a domestic Indian company, he would not have been obliged to pay any tax on that dividend as it was exempt from tax under section 10(34) of the Act, subject to Section 115BBDA. However, the Domestic Indian Company was liable to pay a Dividend Distribution Tax (DDT) under section 115-O.
Post abolition of the Dividend Distribution Tax (DDT) in Finance Act 2020, the dividend income has become taxable in the hands of investors. Therefore, an investor has to disclose all dividends earned during the financial year and has to pay tax on it as per the applicable income tax slab.
TDS on Dividend Distribution
On or after April 1, 2020, the Finance Act of 2020 imposed a TDS on dividend distribution by enterprises and mutual funds vide section 194 of Income Tax Act, 1961. TDS is deducted at a rate of 10% on dividend if the amount of dividend exceeds Rs. 5,000.
A shareholder can claim credit for such TDS in computing net tax liability while filing the income tax return.
TDS is required to be deducted at a rate of 20% on dividends paid to any non-residents, subject to the terms of any DTAA (double taxation avoidance agreement). Non-residents must submit relevant documents such as Form 10F, declaration of beneficial ownership, certificate of tax residency, and other documents to receive the benefit of a lower deduction. In the absence of certain documents, a greater TDS would be deducted, which can be claimed by such non-residents when filing an Income tax return.
Allowance of Expenses against Dividend Distribution
The Finance Act of 2020 has also allowed interest expenses to be deducted from the dividend income. Therefore, if an investor is taking a loan to invest in shares of companies and have received a dividend from such shares, then he can deduct the interest expense from such dividend income.
However, the deduction should not be more than 20% of the dividend income. Also, no other expense such as commission, brokerage or salaries, etc. is admissible for deduction from dividend income.
For instance, Mr. Kumar borrowed money to invest in equity shares and paid Rs 3,800 as interest during FY 2021-22, and earned a dividend of Rs 10,200 during the year. However, Mr. Kumar will be permitted to deduct just Rs. 2,040 (20 percent of Rs. 10,200) as an expense under the income tax act. As a result, Rs. 8,160 (Rs. 10,200 - Rs. 2,040) is taxable in Mr. Kumar's hands.
Dividend Received from Foreign Company
A dividend from a foreign corporation is also taxed in India. The dividend income shall be considered as part of "Income from other sources". Such dividend income will form part of taxpayers’ total taxable income and will be taxed as per the applicable income tax slab.
A Dividend received from a foreign company is taxable both in India and the foreign company's home country.
A taxpayer can claim relief under double taxation agreement, if the tax on an international company's dividend has been paid in both countries.