Tax on Dividend Income & Dividend Tax Rate in India

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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.

Are Dividends Taxable In India?

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

Tax On Dividend Income

Let’s answer how much tax is paid on dividend income of different types-

  1. Mutual Funds- In India, dividends from mutual funds were tax-exempt in the hands of investors. However, mutual fund houses paid a Dividend Distribution Tax (DDT) before distributing dividends to unit holders. The shift in taxation impacted mutual fund dividend plans significantly. Previously, dividends from mutual funds incurred a Dividend Distribution Tax (DDT) of approximately 11.64% for equity funds and about 29% for debt funds, making it a seemingly attractive option for investors.

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.

  1. Foreign Company Dividends- Dividends received from a foreign company are typically considered taxable income in India. They fall under the category of “income from other sources” and are included in the taxpayer’s total income.

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.

  1. Domestic Company Dividends- Following the abolition of Dividend Distribution Tax (DDT), individual shareholders in India are now liable for taxes on dividends from domestic companies. Taxation is based on the shareholder’s applicable income tax slab rates. The Dividend Distribution Tax (DDT) on companies and mutual funds was abolished. Additionally, the tax of 10% on dividend receipts of resident individuals, Hindu Undivided Families (HUFs), and firms in excess of Rs 10 lakh under Section 115BBDA was also withdrawn.
  2. Tax Exemption On Dividend Income-Until recently in India, dividend income received by individuals, Hindu Undivided Families (HUFs), and firms up to Rs 10 lakh enjoyed a tax exemption. However, any dividend income exceeding this threshold became taxable, subject to the individual’s applicable income tax slab rates. This exemption provided relief for most taxpayers on dividend earnings within the specified limit, aligning with efforts to balance taxation on dividend income while offering a tax-free buffer for moderate dividend earnings below the Rs 10 lakh threshold.
  3. Exclusions from dividend income- In India, certain deductions are allowed for interest paid on borrowings used to invest in shares or mutual funds that generate dividend income. Taxpayers can claim a deduction of up to 20% of their gross dividend income. However, charges such as commissions or fees paid to support dividend realisation are not deductible. These limits apply to dividends received from both local and international corporations. This provision attempts to provide a partial deduction for interest charges spent on borrowed money utilised for investments, therefore improving tax efficiency for investors in dividend-paying securities.
  4. Relief from Double Taxation- Dividend income received from a foreign company might be subject to taxation in both India and the foreign company’s home country. However, to avoid double taxation, taxpayers can claim relief in India through the Double Taxation Avoidance Agreements (DTAA) or Section 91 in the absence of such an agreement.

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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