Tax Treatment of Dividend Income received from Company

You may be uncertain how to approach dividend income while submitting your tax return as a taxpayer. Do you have to pay taxes on dividends?

The taxability of dividend income was changed from the dividend declaring corporation to individual investors under the Finance Act 2020.

The old and new tax provisions linked to ‘dividend income’ and their tax effects will be discussed in this article.

What is the DDT (Dividend Distribution Tax)?

In India, a firm must pay a 15% dividend distribution tax if it has declared, distributed, or paid any cash as a dividend. The provisions of DDT were first included in the Finance Act of 1997.

The tax is only payable by a domestic corporation. Domestic enterprises must pay the tax even if they are not required to pay any on their earnings. The DDT will be phased out on April 1, 2020.

Dividend Received from an Indian Company

The taxability of “dividend income” is currently in the hands of investors, following the repeal of the dividend distribution tax.

Old Vs New provision for taxability of dividend income

• The dividend from an Indian corporation was tax-free until March 31, 2020. (FY 2019-20). This was because the corporation announcing the dividend had already paid the dividend distribution tax (DDT) before payment.
• The Finance Act of 2020, on the other hand, modified the way dividends are taxed. All dividends received on or after April 1, 2020, will be taxable in the investor’s/hands. shareholder’s
• Companies and mutual funds are no longer liable for DDT. Similarly, the 10% tax on dividends received by residents, HUFs, and firms above Rs 10 lakh (Section 115BBDA) has been repealed.

TDS on dividend income

• On or after April 1, 2020, the Finance Act of 2020 imposes a TDS on dividend distribution by enterprises and mutual funds.
• TDS is deducted at a rate of 10% on dividend income more than Rs 5,000 from a corporation or mutual fund. However, as part of COVID-19 relief, the government cut the TDS rate for distribution from 14 May 2020 to 31 March 2021 to 7.5 per cent.
• When submitting an ITR, the tax deducted will be applied as a credit against the taxpayer’s overall tax liability.
• Mr Ravi, for example, got a Rs 6,000 dividend from an Indian company on June 15, 2020. The corporation will deduct a TDS of 7.5 per cent on the dividend income, which is Rs 450 because his dividend income exceeds Rs 5,000. Mr Ravi will be given the remaining Rs 5,550. Furthermore, the dividend income is Mr Ravi’s taxable income, taxed at the slab rates in effect for FY 2020-21. (AY 2021-22).
• TDS is required to be deducted at a rate of 20% for non-residents, subject to the terms of any DTAA (double taxation avoidance agreement). Non-residents must submit documentation verification such as Form 10F, declaration of beneficial ownership, certificate of tax residency, and other documents to receive the benefit of a lower deduction due to a beneficial treaty rate with their country of residence. In the absence of certain documents, a greater TDS would be deducted, which can be claimed when filing an ITR.

Deduction of expenses from dividend income

The Finance Act of 2020 also allows for interest expense to be deducted from the payout.

The deduction should not be more than 20% of the dividend income. You cannot, however, claim a deduction for any other expenses involved in producing the dividend income, such as commissions or salary expenses.

Only Rs 1,200 is permissible as an interest deduction if Mr Ravi borrowed money to invest in equity shares and paid interest of Rs 2,700 during FY 2020-21.

Advance Tax on dividend income

If a taxpayer’s total tax liability in a given financial year is equal to or greater than Rs.10,000, advance tax provisions apply. If you don’t pay your advance tax liability or pay it late, you’ll be charged interest and a penalty.

Submission of Form 15G/15H

Form 15G can be submitted to the corporation or mutual fund paying the dividend by a domestic individual whose projected annual income is below the exemption limit.

Similarly, if a senior citizen’s expected annual tax liability is zero, he or she might send Form 15H to the dividend giving corporation.

The corporation or mutual fund notifies shareholders of the dividend declaration via their registered email address and requests that they submit form 15G or form 15H to collect dividend income free of TDS.