Dividend-paying shares, mutual funds, and ULIPs are well-liked methods for buyers to generate a stream of normal earnings. Earlier than 2020, dividend earnings was tax-free within the arms of buyers as a result of firms and mutual funds have been required to pay Dividend Distribution Tax earlier than paying out dividends. Nevertheless, with the abolition of DDT in 2020, dividends at the moment are added to the investor’s earnings and taxed in response to 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 affords.
What’s Dividend Distribution Tax (DDT)?
Earlier than 31 March 2020, the Indian authorities levied a particular tax on firms and mutual fund homes referred to as the Dividend Distribution Tax. In line with this regulation, firms needed to pay a sure share of the declared dividend quantity as DDT earlier than distributing any dividends to buyers. As a consequence of this provision, dividend earnings was fully tax-free within the arms of buyers. Nevertheless, the Finance Act of 2020 modified how dividends are taxed.
Together with DDT, one other particular provision was withdrawn. Below Part 115BBDA, tax on dividend earnings of greater than Rs. 10 lakh per monetary 12 months was levied at 10% within the arms of particular person taxpayers, Hindu Undivided Households, and companies, nonetheless, the earnings is now taxed as per the taxpayer’s slab price.
Taxation of Dividend Revenue in India
As a result of current adjustments, buyers 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 arms of buyers. This earnings is added to the investor’s taxable earnings underneath the pinnacle ‘Revenue From Different Sources’ and taxed in response to their tax slab price.
Thus there isn’t a uniform dividend tax price however quite a variable one relying on the investor’s whole earnings. Below 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 underneath ‘Revenue from Enterprise or Occupation’. The tax charges underneath 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 additionally brokerage and assortment fees, which might carry their tax legal responsibility down extra.
A tax marketing consultant will help you get into the specifics of the distinction between dividend taxation underneath ‘Revenue from Different Sources’ and ‘Revenue from Enterprise or Occupation’.
Revenue earned from dividends can also be topic to TDS (Tax Deducted at Supply). If a taxpayer’s dividend earnings in a monetary 12 months exceeds Rs. 5,000, firms and AMCs are required to deduct a TDS of 10% earlier than paying out the dividends underneath 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 Price for Completely different Buyers
The dividend tax price differs primarily based 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 response to relevant earnings tax slab charges. A ten% TDS can also be deducted in case their annual earnings from dividends exceeds Rs. 5,000 per 12 months. 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 advanced. Investing in GDR (World Depository Receipt) of Indian firms and PSUs utilizing international forex attracts a tax price of 10% on dividend earnings. NRIs incomes dividend earnings taxable in India by investing in home firms utilizing international forex additionally appeal to tax however at the next tax price of 20%. Another dividend earnings earned by NRIs can also be charged on the 20% tax price.
So far as TDS is anxious, NRIs are taxed at the next price in comparison with resident Indians, at 20%.
For Corporates and FPIs (Overseas Portfolio Buyers)
The dividend earnings earned on securities apart from those listed underneath 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 line with this new system, firms or mutual fund homes distributing dividends must deduct TDS earlier than making the cost to their buyers. The precise price of TDS will depend on the investor’s residential standing. For residents, these guidelines are talked about underneath 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 12 months. 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 probably 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 probably be credited to the person.
However, TDS guidelines on dividend earnings for NRIs are acknowledged underneath Part 195. When an Indian firm distributes dividends to a non-resident investor, it should deduct TDS at 20%. This price will be decreased if the NRI’s nation has a Double Taxation Avoidance Settlement with India.
Methods to Cut back TDS
In case a resident investor’s whole earnings in a monetary 12 months is under the fundamental exemption restrict, they will 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 resembling Type 10F, a Tax Residency Certificates (TRC), and a declaration of helpful possession. These will assist them declare their dividends at a lot decreased 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 12 months it’s declared, distributed, or paid – whichever happens first. An interim dividend, however, is taxable within the monetary 12 months 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 have been abolished alongside DDT, nonetheless, a couple of stay. Some provisions within the Revenue Tax Act make dividend earnings exempt from tax underneath particular circumstances. For instance, dividends obtained from agricultural cooperatives are exempt, as are dividends obtained by registered charitable trusts.
Buyers may also declare deductions on bills incurred to earn dividends. For instance, merchants whose dividend earnings is classed as ‘Revenue from Enterprise or Occupation’ can get pleasure from 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 fees for realising dividend funds. Buyers whose dividend earnings is taxed underneath ‘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.
Outdated vs. New Provision for Taxability of Dividend Revenue
As much as 31 March 2020, dividend earnings was tax-free within the arms of buyers. Firms and AMCs paid the Dividend Distribution Tax earlier than paying out dividends. Nevertheless, the Finance Act of 2020 modified this provision by abolishing DDT. Below the brand new guidelines, dividends are added to the investor’s taxable earnings and taxed in response to their slab charges. Thus the largest distinction between the outdated and the brand new provision is that as a substitute of the corporate distributing the dividends, it’s the buyers who pay the tax.
Apart from this, the Part 115BBDA provision was withdrawn. It acknowledged that dividends in extra of Rs. 10 lakh obtained by resident people, HUFs, and companies 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
To this point 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 otherwise primarily based on shareholding. Below Part 115BBD, if the home firm holds not less than 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 can be claimed for bills associated to incomes this earnings.
The way to Cut back Tax on Dividend Revenue?
Ever because the 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 attainable, it’s best to contemplate getting assist from tax consulting companies, who can information you thru the intricate methods of minimising tax legal responsibility whereas making certain compliance with ever-changing guidelines and rules. Listed here are some methods one can contemplate to scale back their tax legal responsibility.
1. Holding Dividend Shares in Tax-Environment friendly Accounts
Selecting choices like development mutual funds over dividend-paying funds will 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 supply tax deductions as much as Rs. 1.5 lakh per 12 months underneath Part 80C and in addition 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 Reduction
DTAAs are additionally referred to as tax treaties, and so they assist forestall double taxation for people incomes earnings in two or extra nations. 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 will get a decreased TDS price by offering Tax Residency Certificates and different required paperwork to the related authorities.
3. Timing Dividend Withdrawals for Tax Optimization
One other well-liked technique for minimising taxation of dividend earnings is by spreading it throughout members of the family who fall underneath the fundamental exemption restrict or decrease tax slabs. Utilizing Type 15G or 15H may even make TDS on dividend earnings exempt if the person’s whole annual earnings isn’t taxable.
Conclusion
Earlier than 31 March 2020, the federal government levied a Dividend Distribution Tax on firms. Earlier than distributing dividends to their buyers, firms 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 arms of taxpayers at their relevant slab charges. It additionally launched TDS provisions, which state that 10% should be deducted if an investor’s dividend earnings exceeds Rs. 5,000 per 12 months.