Understanding dividend income taxation
Upstox
3 min read • Updated: February 20, 2024, 1:10 AM
Summary
You invest in shares and have opted for the dividend option. So, as a shareholder, you receive dividends from time to time. But are these dividends taxable in your hands? Let us find out.
What is dividend distribution tax?
When it comes to taxation on dividends, Finance Bill of 2020 has changed the scope of taxability of dividend income in India.
Dividend distribution tax (DDT) was a tax that companies in India had to pay on the dividends they issued to their shareholders. The DDT was levied by the government and applied to the company distributing the dividends, rather than the shareholders receiving them. However, in the Budget 2020 speech, Finance Minister Nirmala Sitaraman abolished the DDT. This took effect from the Financial Year 2020-21.
Previously, dividends received by shareholders from domestic corporations were exempt from income tax in the hands of the shareholders, while the company distributing the dividend was required to pay DDT under Section 115-O of the Income Tax Act.
The taxation on dividends has changed. Now, dividends are taxed in the hands of investors. This means that individuals, Hindu Undivided Families (HUFs), and businesses are now liable for paying taxes on profits received, rather than the companies that distribute them.
What is the TDS on dividend income?
If your dividend income exceeds ₹5000 during a financial year, a 10% tax deducted at source (TDS) is applied. This is the case if your permanent account number (PAN) is linked to your bank account. In case, you haven’t linked your PAN to your bank account, the applicable TDS rate is 20%.
[Note: The 20% TDS includes the zero tax slab (i.e. income below ₹2.5 lakh) as well.]
Am I eligible for any exemptions or deductions?
You can claim a deduction on behalf of such income received. However, the deduction cannot be more than 20% of the actual income from dividends received. Such deductions include the interest on a loan (if taken) solely taken for the purpose of investing in equity shares. You cannot claim a deduction for any other expenses such as commission or salary expenses to earn that dividend income.
And dividends from foreign companies are to be taxed under the head ‘Income from other sources’. They are eligible for a deduction of up to 20% of the gross dividend income for interest expenses only. This income is exempt from being taxed again anywhere else to avoid double taxation.
When do I have to pay advance tax on dividend income?
When you sell your shares, you will have to pay an advance tax on the dividends that you received from the sale. This tax is levied by the Income Tax department at a fixed rate of 15% or 20%. This is applicable only if your total tax liability is ₹10,000 or more.
Conclusion
While earning huge dividends is a great source of passive income, handling its taxability is crucial. Hence, computing your taxable dividend income is necessary for all investors.