All about how dividends would be taxed from this fiscal

 

All about how dividends would be taxed from this fiscal

Dividends would be taxed in the hands of the recipients and not companies or fund houses

 

Do you expect to receive dividends from Indian companies and Mutual Funds in this financial year? Check for the tax withheld by the domestic companies and Mutual Funds from your dividends. With effect from financial year (FY) 2020-21, dividend is taxable in the hands of the shareholders and unit holders and not in the hands of the company/Mutual Fund.

For the past several years, in order to reduce the compliance burden on account of withholding taxes on dividend for both, companies (in the form of E-TDS returns and issuing TDS certificates) and individuals (in the form of enclosing the TDS certificates in the tax return), dividends had been exempted from tax in the hands of recipients. The tax burden was shifted from the recipients to the companies and Mutual Funds themselves. A domestic company or Mutual Fund in India, which had declared, distributed or paid any amount as dividend, was required to pay a distribution tax on such dividends.

From DDT to personal tax slab

Dividend distribution tax (DDT) at the rate of 15 per cent (plus applicable surcharge and cess) was lower than the highest tax rate payable by individual taxpayers at 30 per cent (plus applicable surcharge and cess). Consequently, dividends received by tax payers who had high dividend income was indirectly subjected to tax at a lower rate. To address this anomaly, from FY 2016-17 onwards, resident individuals having dividend from domestic companies in excess of Rs 10 lakhs were liable to tax at 10 per cent (plus applicable surcharge and cess) on such dividend, in addition to the companies paying DDT.

Technically, dividend is income in the hands of the shareholders and unit holders, and not in the hands of the company and Mutual Funds. Also, with the advent of technology and easy tracking system available, now the process of withholding tax or offering the dividend income to tax is no longer cumbersome. Hence, from FY 2020-21 onwards, dividends from domestic companies and mutual funds are taxable in the hands of the shareholders and unit holders at their applicable slab rates and DDT has been abolished.

As dividends have been made taxable in the hands of the individual, the provisions for withholding tax have also been reinstated. Domestic companies and mutual funds are liable to withhold tax at 10 per cent on dividend income paid to resident individuals in excess of Rs 5,000. However, as a temporary relief measure due to COVID-19, tax withholding rate has been reduced to 7.5 per cent till 31 March 2021. Please note that your annual tax credit statement (Form 26AS) is likely to have the details of only such dividend on which tax has been withheld (i.e., dividend income in excess of Rs 5,000).

Taxation of NRIs

For non-resident individuals, tax withholding would be at 20 per cent (plus applicable surcharge and cess). A non-resident individual also has the option of being governed by the provisions of the Double Tax Avoidance Agreement (DTAA) between India and his country of tax residence, if they are more beneficial to him. For instance, if a DTAA restricts taxation of dividend income to 15 per cent for a resident of that country, the tax rate mentioned would be applicable for computing tax as well as withholding tax, subject to specified conditions being met (including obtaining a tax residency certificate from the country of residence outside India).

Interest expenses incurred to earn such dividend are allowed to be deducted from the dividend up to a maximum of 20 per cent of the dividend income. No other expenses can be claimed against the dividend income.

Dividend income from foreign companies continues to be taxable at the applicable slab rates. If a resident individual has paid tax in a foreign country and is liable to pay tax in India also, he can claim foreign tax credit as per the DTAA with the foreign country.

In view of the above, it will be prudent to keep an eye on the dividends received during the year, so that the same can be factored into the estimated taxable income while determining the advance tax payable during the year and offered accurately to tax in the tax return.

Happy Investing