What is Dividend Taxation?
Dividend taxation refers to the tax treatment of profits distributed by companies to their shareholders. Until March 31, 2020, India followed the Dividend Distribution Tax (DDT) regime where companies paid tax on distributed dividends. However, from April 1, 2020, the tax liability shifted to shareholders.
Types of Dividends
- • Final Dividend: Declared at the Annual General Meeting (AGM) after financial year end
- • Interim Dividend: Declared between two AGMs during the financial year
- • Special Dividend: One-time dividend declared for special occasions
- • Stock Dividend: Issued as additional shares rather than cash
DDT Abolition (Budget 2020)
The Finance Act, 2020 abolished the Dividend Distribution Tax (DDT) regime effective April 1, 2020. This was a significant change in dividend taxation policy.
Old vs New Regime
| Aspect | Old Regime (Before April 2020) | New Regime (From April 2020) |
|---|---|---|
| Tax on dividends | Company paid DDT @ 15% + cess | Shareholder pays tax at slab rates |
| Tax credit | No credit for shareholders | TDS credit available |
| Effective rate | ~20.56% (including surcharge & cess) | As per shareholder slab (0-30%) |
| Who pays tax | Company | Shareholder |
| TDS | Not applicable | 10% if dividend > ₹5,000 |
Benefits of New Regime
- • Lower tax burden for shareholders in lower tax brackets
- • Foreign investors can claim tax credit in home countries
- • Eliminates cascading effect of DDT
- • Better alignment with international tax practices
Taxability of Dividends
Under the current regime, dividends are taxable in the hands of shareholders at their applicable income tax slab rates. The company is not required to pay any tax on distributed dividends.
Tax Rates for Different Categories
| Category of Shareholder | Tax Rate |
|---|---|
| Resident Individuals & HUF | Slab rates (0% to 30%) |
| Domestic Companies | 25% / 30% (as applicable) |
| Partnership Firms / LLPs | 30% flat rate |
| Non-Resident Individuals | Slab rates or DTAA rate |
| Foreign Companies | 40% + surcharge + cess |
| NRIs / FIIs | 20% under Section 115AD |
Section 115BBDA (Abolished)
Earlier, Section 115BBDA imposed 10% tax on dividends exceeding ₹10 lakhs received by individuals, HUFs, and firms. This section has been abolished from April 1, 2020, and dividends are now taxed at regular slab rates.
TDS on Dividends
Companies are required to deduct Tax Deducted at Source (TDS) on dividend payments under Section 194 and 194K.
TDS Rates and Thresholds
| Section | Recipient | Threshold | TDS Rate |
|---|---|---|---|
| 194 | Resident Individual/HUF | ₹5,000 per year | 10% |
| 194 | Resident - Others | No threshold | 10% |
| 194K | Resident - Mutual Fund units | ₹5,000 per year | 10% |
| 195 | Non-Residents | No threshold | As per DTAA or 20% |
Important TDS Provisions
- • PAN not furnished: TDS at 20% under Section 206AA
- • Lower TDS certificate: Can apply for lower/nil TDS under Section 197
- • No TDS: If total dividend in a financial year does not exceed ₹5,000
- • TDS deposit: Company must deposit TDS by 7th of next month
- • Form 16A: TDS certificate issued by company
Reporting Dividend Income
In Income Tax Return
- • Report under "Income from Other Sources" (Schedule OS)
- • Specify amount of dividend received from Indian companies
- • Claim TDS credit in Schedule TDS
- • Interest expenditure (if any) can be claimed as deduction up to 20% of dividend income
Documents to Maintain
- • Dividend warrants / credit advice from company
- • Bank statements showing dividend credits
- • Form 16A (TDS certificate) from company
- • Form 26AS for TDS verification
- • Interest certificates if loan taken for investment
Exempt Dividends (Section 10)
- • Dividend from Indian companies is NOT exempt (unlike earlier years)
- • Dividend received by a company from a domestic company is exempt under Section 10(34) if it distributes the same within specified time
- • Dividend from specified foreign companies may have specific exemptions
Advance Tax on Dividends
Since dividend income is taxable in the hands of recipients, advance tax provisions apply. The instalment in which the dividend is received becomes relevant.
Due Dates for Advance Tax
| Due Date | Advance Tax to be Paid |
|---|---|
| On or before June 15 | Up to 15% of advance tax liability |
| On or before September 15 | Up to 45% of advance tax liability |
| On or before December 15 | Up to 75% of advance tax liability |
| On or before March 15 | Up to 100% of advance tax liability |
Important Point
It may be difficult to estimate dividend income in advance. If advance tax is not paid because the dividend income could not be estimated, no interest under Section 234C is charged provided the advance tax is paid in the subsequent instalment after receipt of dividend.
Foreign Dividends
Dividends received from foreign companies are also taxable in India for residents. The tax treatment differs based on residential status.
Tax Treatment
- • Resident taxpayers: Foreign dividends taxed at slab rates
- • Foreign Tax Credit: Available for tax paid abroad (as per DTAA or Section 91)
- • Form 67 must be filed to claim FTC
- • Report in Schedule OS (Foreign Income) and Schedule FA (Foreign Assets)
Foreign Tax Credit Calculation
Foreign Tax Credit is the lower of:
- 1. Tax paid in foreign country
- 2. (Indian tax liability × Foreign dividend income) ÷ Total income
Tax Planning for Dividends
Spread Across Family Members
- • Gift shares to family members in lower tax brackets
- • Each member gets ₹5,000 TDS-free limit
- • Basic exemption limit utilization
Timing of Purchase/Sale
- • Buy before record date to receive dividend
- • Consider ex-dividend price impact
- • Plan for advance tax payments
Interest Expense Deduction
- • Claim interest on loan taken for investment
- • Deduction limited to 20% of dividend income
- • Maintain proper documentation
Lower TDS Certificate
- • Apply for Section 197 certificate if eligible
- • Useful for senior citizens with lower income
- • Prevents excess TDS deduction
Frequently Asked Questions
Q: Is dividend income tax-free in India?
No, dividend income is not tax-free. DDT was abolished in April 2020, and now dividends are taxable in the hands of shareholders at their applicable slab rates.
Q: What is the tax-free dividend limit in India?
There is no specific tax-free dividend limit. Dividends are added to your total income and taxed at slab rates. However, no TDS is deducted if total dividend in a year is up to ₹5,000.
Q: Do I need to pay advance tax on dividend income?
Yes, if your total tax liability after TDS exceeds ₹10,000, you must pay advance tax. However, no interest is charged under Section 234C if you pay in the instalment after receiving the dividend.
Q: Can I claim deduction for expenses incurred to earn dividend income?
Yes, you can claim deduction for interest expenses incurred to earn dividend income, limited to 20% of the dividend income. Other expenses are not deductible.
Q: How do I claim TDS credit on dividends?
TDS deducted on dividends is reflected in your Form 26AS. You can claim credit for this TDS in your Income Tax Return under Schedule TDS. Ensure the TDS matches with your Form 16A.
Q: Are dividends from mutual funds also taxable?
Dividends from mutual funds (IDCW - Income Distribution cum Capital Withdrawal) are also taxable in the hands of unitholders at slab rates, with TDS at 10% if exceeding ₹5,000.
Q: What if TDS is deducted but my income is below taxable limit?
You can claim refund of the TDS by filing your Income Tax Return. The TDS credit will be adjusted against your tax liability, and any excess will be refunded.
Q: Is TDS applicable on dividends received by NRIs?
Yes, TDS is applicable on dividends paid to NRIs. The rate depends on the DTAA between India and the NRI's country of residence, generally ranging from 10% to 25%.