The Simplest Article to understand Taxation of Dividends

1. What is a Dividend?

A dividend is the amount of money given by the Company to its shareholders. The dividend is the return that a shareholder gets for investing in the company by the company.

It is the reward for holding the investment in the company. For example, Mr. Anirudh holds 150 shares in Reliance Industries Ltd. He purchased the shares at Rs 2,450 per share. His total investment works out to be

No. of Shares X Purchase Value of Shares = 150 X Rs 2,450 = Rs 3,67,500

Reliance in its Annual General Meeting declares a dividend of Rs 175 per share. So the dividend earned by Mr. Anirudh comes out to be

No. of Shares X Dividend declared for each share = 150 X Rs 175 = Rs 26,250

This Rs 26,250 is the Dividend Income for Mr. Anirudh.

2. What is the Taxability Head as per the Income Tax Act 1961 for Dividend Income?

The Taxation head depends on whether the shareholder is holding shares as a trader or Investor. If the shareholder is in the business of Trading ( sale/purchase) of shares, then the Dividend will be taxable under the head of Income from Business/Profession.

However, if the shareholder is holding the shares as an Investor, then as per the Provisions of Income Tax Act 1961 Dividend is taxed under the head Income From other Sources.

3. Is TDS deductible on Dividends?

Tax Deducted at Source commonly called TDS is applicable on Dividends too. TDS applicability on Dividends is clarified under Section 194 of the Income Tax Act. It means that the dividend-paying company deducts TDS while making payments to the shareholder

TDS provisions depend on the PAN status of the shareholder

• In case the Shareholder is an Indian Resident Individual

If the Dividend amount is less than Rs 5,000 - TDS is Nil

If the Dividend amount is more than Rs 5,000- the TDS rate is 10%

• In case the Shareholder is an Indian Resident of HUF, Firm, Company, etc

No Dividend amount is exempted from TDS. The TDS rate is 10%

• In case the Shareholder is a Non-Resident Indian or Non-Resident

The TDS for payments made to Non-Residents is governed by the provisions of Section 195 of the Act. In the case of Non-Residents, there is no exemption, furthermore, the TDS rate is also double the TDS rate for Residents. TDS on Dividend payments to Non-Resident shareholders is 20%

4. Under what situations you can avoid getting TDS deducted on Dividends?

1. The dividend paid by any Insurance company is not subject to TDS
2. If the Shareholder submits form 15G/15H to the Dividend declaring company then TDS won't be deducted by the dividend-paying company
3. If the shareholder is an Insurance company or Mutual Fund then TDS won't be deducted by the dividend-paying company.

5. Are there any deductions that can be claimed from Dividend Income?

The deduction can be claimed from Dividend Income and the deduction depends on whether the Dividend is Taxable under the Head of Income from Business/Profession or Income from Other Sources

• Deductions-If Taxable under the Head of Income from Business/Profession

All the expenses incurred in running the share trading business can be claimed as a deduction.

• Deductions-If Taxable under the Head Income from Other Sources

In such cases, only one deduction can be claimed from Dividend Income. If the shareholder has borrowed any interest-bearing loan for investment in shares then the interest paid on the such loan can be claimed as a deduction. The maximum that can be claimed as a deduction is 20% of the Gross Dividend or the interest amount whichever is lower

For example, in the above case, Mr. Anirudh has paid interest of Rs 10,000 on a loan taken for an investment in shares

The deductible amount is lower of

20% of Gross Dividend = 20 % of Rs 26,250 = Rs 5,250

Interest paid on loan = Rs 10,000

Deduction available = Rs 5,250 ( Lower of Rs 5,250/ Rs 10,000)

Taxable Dividend= Gross Dividend less Deduction = Rs 26,250- Rs 5,250 = Rs 21,000

6. Are Dividends taxed at Special Rates?

• In the case of Residents

No, dividends are not taxed at any Special rates. Dividend Income is added to the other income of the shareholder and is taxed at the Normal Slab Rates/Tax rates applicable to the assessee/shareholder.

• In the case of Non-Residents

Dividends received by Non-Residents are taxed at Special Rates. A summarized Table to help you ascertain the Dividend Tax Rates for Non-Residents is as follows:

7. What is the taxability of the Dividend if it is received from a Company registered outside India?

The tax treatment of the Dividend received from a foreign company is the same as Dividend received from an Indian Company. The point to be kept in mind in such a case is that if such a Dividend is already subject to tax in the Foreign country then reference to the Double Tax Avoidance Agreement should be made to claim the credit of tax paid in the Foreign Country.

8. How can you know the amount of Dividends received by you?

There are multiple ways in which you can know the Dividends received

1. Bank Statement- Go through the credits/receipts in the bank statement to ascertain the name of the company and the amount of dividend paid by them to you. This could be a slightly time-consuming activity.
2. Annual Information Statement- Check your AIS by logging into your Income Tax login account. The steps to be followed are:

•  Login by using your PAN and password on https://eportal.incometax.gov.in/iec/foservices/#/dashboard
• Hover on Services. Click on Annual Information Statement (AIS)
• On click of the 'Proceed' button, you will be redirected to the AIS homepage on Compliance Portal. Click on Proceed
• Click on "AIS"
• Further Click on Annual Information Statement (AIS)
• See PART B ( TDS/TCS Information )
• Information Category – Dividends will be reflected here

DEMAT Trading Account- You can download the Investment ledger or statement of your respective DEMAT Trading account to ascertain the amount of dividends credited to your account.