Dividend income is money distributed to shareholders from a company’s profits. It’s a return on investment, separate from capital gains, given to individuals owning stock, mutual funds, or certain investments. This income, often in cash or additional shares, reflects a company’s decision to share its success with shareholders, serving as a regular source of earnings for investors.
If you get dividends from your investments, the first thing that may come to mind is whether or not the dividends from shares taxable in India. In India, dividends received from domestic companies were subject to Dividend Distribution Tax (DDT), which was typically paid by the company before distributing dividends to shareholders. However, the Finance Act of 2020 abolished DDT, shifting the tax burden on dividends to the recipients rather than the companies distributing them
Let’s answer how much tax is paid on dividend income of different types-
With the removal of DDT, dividends are now taxed according to the investor’s applicable income tax slab rates. For those in higher tax brackets, around 30% plus additional surcharge and cess may apply. This higher tax rate on dividends could discourage investors from choosing dividend plans, altering the attractiveness of this investment avenue due to increased tax liabilities for certain individuals.
The taxation of foreign dividends is subject to the applicable income tax rates based on the taxpayer’s income slab. Additionally, individuals receiving dividends from foreign companies might need to declare this income and pay taxes accordingly as per the tax brackets they fall into, along with any surcharge and cess applicable to their income. If tax has not been deducted at the source, shareholders are responsible for declaring and paying tax on these dividends in their income tax returns. Tax implications can vary based on tax treaties between India and the country where the foreign company is based. Understanding these provisions and potential tax credits is essential for accurate tax assessment on foreign company dividends.
Under DTAA, taxpayers can benefit from provisions outlined in the agreement between India and the foreign country to prevent double taxation. Alternatively, if there’s no specific agreement, Section 91 of the Income Tax Act enables taxpayers to claim relief by computing the tax payable in India on the foreign income while considering the tax already paid in the foreign country.
This relief mechanism ensures that individuals aren’t taxed twice on the same income and promotes fair taxation for dividend earnings from international companies. Consulting tax professionals can optimize relief claims in compliance with relevant tax laws and agreements.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
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