Dividend-paying shares, mutual funds, and ULIPs are in style methods for traders to generate a stream of standard earnings. Earlier than 2020, dividend earnings was tax-free within the fingers of traders as a result of corporations and mutual funds had been required to pay Dividend Distribution Tax earlier than paying out dividends. Nonetheless, with the abolition of DDT in 2020, dividends are actually added to the investor’s earnings and taxed in line with their tax slab price.
Right here we’ll discover the previous and current taxation of dividend earnings by tackling ideas like what’s DDT, present dividend taxation guidelines, tax charges, dividend TDS, and exemptions in tax on dividend earnings India provides.
What’s Dividend Distribution Tax (DDT)?
Earlier than 31 March 2020, the Indian authorities levied a particular tax on corporations and mutual fund homes referred to as the Dividend Distribution Tax. In response to this regulation, corporations needed to pay a sure share of the declared dividend quantity as DDT earlier than distributing any dividends to traders. Resulting from this provision, dividend earnings was utterly tax-free within the fingers of traders. Nonetheless, the Finance Act of 2020 modified how dividends are taxed.
Together with DDT, one other particular provision was withdrawn. Beneath Part 115BBDA, tax on dividend earnings of greater than Rs. 10 lakh per monetary yr was levied at 10% within the fingers of particular person taxpayers, Hindu Undivided Households, and corporations, nonetheless, the earnings is now taxed as per the taxpayer’s slab price.
Taxation of Dividend Revenue in India
Because of the current modifications, traders could get confused about whether or not or not dividend earnings is taxable. The reply is sure. With the abolition of DDT, dividend earnings is taxed totally within the fingers of traders. This earnings is added to the investor’s taxable earnings below the top ‘Revenue From Different Sources’ and taxed in line with their tax slab price.
Thus there isn’t any uniform dividend tax price however relatively a variable one relying on the investor’s complete earnings. Beneath Part 57 of the Revenue Tax Act, the one deduction relevant when earnings has this classification is on the curiosity bills incurred to earn such an earnings, which is capped at 20% of the overall dividend earnings.
In case an organization’s shares are held for buying and selling functions as a part of a enterprise, dividend earnings is taxed below ‘Revenue from Enterprise or Occupation’. The tax charges below this earnings classification are additionally the identical because the classification above, nonetheless, it does enable taxpayers to say sure additional deductions on bills like not solely the mortgage curiosity but in addition brokerage and assortment expenses, which might deliver their tax legal responsibility down extra.
A tax advisor may also help you get into the specifics of the distinction between dividend taxation below ‘Revenue from Different Sources’ and ‘Revenue from Enterprise or Occupation’.
Revenue earned from dividends can be topic to TDS (Tax Deducted at Supply). If a taxpayer’s dividend earnings in a monetary yr exceeds Rs. 5,000, corporations and AMCs are required to deduct a TDS of 10% earlier than paying out the dividends below Part 194. This provision additionally got here into impact on 1 April 2020. We’ll take a deeper dive into TDS guidelines and exemptions on dividend earnings within the following sections.
Dividend Tax Charge for Completely different Traders
The dividend tax price differs based mostly on the taxpayer’s residential standing (Resident or NRI) and the kind of funding which pays the dividend.
For Resident People
Dividend earnings earned by residents investing in any home firm is taxed in line with relevant earnings tax slab charges. A ten% TDS can be deducted in case their annual earnings from dividends exceeds Rs. 5,000 per yr. This quantity will be claimed as a refund or adjusted with the ultimate tax legal responsibility on the time of submitting returns.
For Non-Resident People (NRIs)
For NRIs, the foundations of tax on dividend earnings are a bit extra complicated. Investing in GDR (International Depository Receipt) of Indian corporations and PSUs utilizing international foreign money attracts a tax price of 10% on dividend earnings. NRIs incomes dividend earnings taxable in India by investing in home corporations utilizing international foreign money additionally entice tax however at a better tax price of 20%. Some other dividend earnings earned by NRIs can be charged on the 20% tax price.
So far as TDS is worried, NRIs are taxed at a better price in comparison with resident Indians, at 20%.
For Corporates and FPIs (Overseas Portfolio Traders)
The dividend earnings earned on securities apart from those listed below 115AB is topic to twenty% tax.
TDS on Dividend Revenue
Along with abolishing the DDT, the Finance Act of 2020 additionally launched TDS taxation of dividend earnings. In response to this new system, corporations or mutual fund homes distributing dividends need to deduct TDS earlier than making the cost to their traders. The precise price of TDS will depend on the investor’s residential standing. For residents, these guidelines are talked about below Part 194, which states that dividend earnings is topic to a ten% TDS if the investor’s dividend earnings exceeds Rs. 5,000 per monetary yr. This price will increase to twenty% in the event that they fail to supply their PAN particulars.
For instance, if a person earns Rs. 9,000 dividend earnings from an organization, TDS at 10% will likely be deducted earlier than the remaining quantity is distributed to the shareholder because it exceeds Rs. 5,000. Thus Rs. 9,000 – Rs. 900 = Rs. 8,100 will likely be credited to the person.
However, TDS guidelines on dividend earnings for NRIs are said below Part 195. When an Indian firm distributes dividends to a non-resident investor, it should deduct TDS at 20%. This price will be lowered if the NRI’s nation has a Double Taxation Avoidance Settlement with India.
Methods to Cut back TDS
In case a resident investor’s complete earnings in a monetary yr is under the essential exemption restrict, they’ll submit Type 15G (or Type 15H if they’re a senior citizen) to the dividend-paying firm or mutual fund home to stop TDS deduction. Even when any TDS is deducted, it may be claimed as a refund on the time of submitting earnings tax returns.
To get the DTAA profit, NRIs want paperwork akin to Type 10F, a Tax Residency Certificates (TRC), and a declaration of helpful possession. These will assist them declare their dividends at a lot lowered TDS charges.
When is Dividend Revenue Taxable?
Part 8 of the Revenue Tax Act solutions when dividends are taxable. The ultimate (and deemed) dividend is taxable within the yr it’s declared, distributed, or paid – whichever happens first. An interim dividend, however, is taxable within the monetary yr when it’s unconditionally made out there to the shareholder.
Dividend Revenue Exemptions and Deductions
Many of the advantages that allowed tax reduction on dividend earnings had been abolished alongside DDT, nonetheless, a couple of stay. Some provisions within the Revenue Tax Act make dividend earnings exempt from tax below particular circumstances. For instance, dividends acquired from agricultural cooperatives are exempt, as are dividends acquired by registered charitable trusts.
Traders may declare deductions on bills incurred to earn dividends. For instance, merchants whose dividend earnings is classed as ‘Revenue from Enterprise or Occupation’ can take pleasure in deductions on varied bills associated to their buying and selling exercise like curiosity on loans taken to buy dividend-paying shares, brokerage charges related to buying and selling, and assortment expenses for realising dividend funds. Traders whose dividend earnings is taxed below ‘Revenue from Different Sources’ can solely declare a deduction on curiosity bills incurred to earn dividends, which is capped at 20% of the overall dividend earnings.
Previous vs. New Provision for Taxability of Dividend Revenue
As much as 31 March 2020, dividend earnings was tax-free within the fingers of traders. Corporations and AMCs paid the Dividend Distribution Tax earlier than paying out dividends. Nonetheless, the Finance Act of 2020 modified this provision by abolishing DDT. Beneath the brand new guidelines, dividends are added to the investor’s taxable earnings and taxed in line with their slab charges. Thus the largest distinction between the previous and the brand new provision is that as an alternative of the corporate distributing the dividends, it’s the traders who pay the tax.
Apart from this, the Part 115BBDA provision was withdrawn. It said that dividends in extra of Rs. 10 lakh acquired by resident people, HUFs, and corporations could be taxed at a flat price of 10%. Now, the tax on dividend earnings for people or entities will depend on their slab charges.
Inter-Company Dividend Taxation
Up to now we’ve mentioned tax on dividend earnings for people, however what occurs when one firm receives dividends from one other firm? Earlier this type of earnings was additionally topic to DDT, however ever because it was abolished, a brand new provision was launched. When a home firm receives dividends from one other home firm, it’s taxed as per the company tax price relevant to it. The Authorities additionally launched Part 80M to supply reduction from double taxation on inter-corporate dividends. This part permits a home firm to say a deduction on the quantity of dividends it receives from one other home firm, however provided that it redistributes the identical dividends to its shareholders inside one month of the due date for submitting returns.
In case a home firm receives dividends from a international firm, the dividends are taxed in another way based mostly on shareholding. Beneath Part 115BBD, if the home firm holds a minimum of 26% fairness within the international firm, the dividend earnings is taxed at a dividend tax price of 15% with no deductions allowed for bills incurred to earn the dividend. In case the shareholding is under 26%, the dividend is taxed on the regular company tax price relevant to the home firm which will depend on the turnover. Deductions will also be claimed for bills associated to incomes this earnings.
The way to Cut back Tax on Dividend Revenue?
Ever for the reason that DDT together with its particular provisions was abolished, the scope for tax-efficient dividend planning has modified. With dividends now being taxed at particular person slab charges, high-income earners face a heavier tax burden. For instance, dividend earnings over Rs. 10 lakh was taxed at 10% pre-2020, however now it may well go as much as 30%. To avoid wasting as a lot of your hard-earned cash as doable, it’s best to think about getting assist from tax consulting providers, who can information you thru the intricate methods of minimising tax legal responsibility whereas making certain compliance with ever-changing guidelines and laws. Listed below are some methods one can think about to cut back their tax legal responsibility.
1. Holding Dividend Shares in Tax-Environment friendly Accounts
Selecting choices like progress mutual funds over dividend-paying funds may also help avoid wasting tax because the earnings is taxed as capital good points and never as dividend earnings. Fairness funds like ELSS (Fairness Linked Financial savings Schemes) additionally provide tax deductions as much as Rs. 1.5 lakh per yr below Part 80C and likewise make long-term capital good points as much as Rs. 1.25 lakh exempt from tax which might result in additional tax financial savings.
2. Utilizing DTAA for Overseas Dividend Tax Aid
DTAAs are additionally referred to as tax treaties, they usually assist stop double taxation for people incomes earnings in two or extra international locations. These treaties can be utilized by NRIs to considerably decrease their dividend tax price. For instance, the usual TDS price on dividend earnings is 20% for NRIs. If an investor can declare DTAA advantages, they’ll get a lowered TDS price by offering Tax Residency Certificates and different required paperwork to the related authorities.
3. Timing Dividend Withdrawals for Tax Optimization
One other in style technique for minimising taxation of dividend earnings is by spreading it throughout relations who fall below the essential exemption restrict or decrease tax slabs. Utilizing Type 15G or 15H may even make TDS on dividend earnings exempt if the person’s complete annual earnings isn’t taxable.
Conclusion
Earlier than 31 March 2020, the federal government levied a Dividend Distribution Tax on corporations. Earlier than distributing dividends to their traders, corporations paid tax on their declared dividends. The tax on dividend earnings India modified with the Finance Act of 2020, which abolished DDT and its particular provisions, making dividend earnings taxable within the fingers of taxpayers at their relevant slab charges. It additionally launched TDS provisions, which state that 10% have to be deducted if an investor’s dividend earnings exceeds Rs. 5,000 per yr.
