Last Updated on May 24, 2022 by
Since the fiscal year 2020-21, the Income Tax Department of India has been following what is called a classical system of taxation wherein dividends will be taxed from investors themselves rather than from companies, which was previously the case.
With the emergence of new fiscal rules, the Finance Act, 2020 has declared many changes in the taxability of dividends gained from both domestic and foreign companies, which is vital for the new tax regime. Changes in the income tax, TDS, and advanced tax on dividend income are few.
Down below are detailed briefs on each case.
Table of Contents
Old vs existing provisions for taxability of dividend income
The dividend received by an investor from an Indian company was exempt till FY 2019-2020 since the company already paid the Dividend Distribution Tax (DDT) before making the profit payments.
Post the FY 2019-2020, the taxation method has been changed in the Indian income laws. The responsibility of taxation shifted to individual shareholders from the company after 1 April 2020.
Provisions for dividends received from an Indian company
Any Indian company which is considered as “domestic” shall henceforth not be liable to pay DDT on the profits/dividends they have paid shareholders after 1 April 2020. However, companies will still be liable to pay taxes under section 194 of the Income Tax Act.
Section 194: This Act determines the dividend tax rate. Domestic companies can deduct tax at a 10% rate from the dividend they have distributed to the shareholder if the individual’s share exceeds Rs. 5,000 during one financial year.
No taxes shall be required if the dividend is from:
- Life Insurance Corporation of India (LIC)
- General Insurance Corporation of India (GIC)
- Any other insurer
Abolishment of the DDT
A dividend is a profit returned by a company to its investing shareholders from the entire profits it has earned in a specific financial year. This dividend is considered added income that should be counted as taxable.
Indian income tax laws, however, levy the DDT on the company paying the dividend to its investors, the provisions of which are governed in Section 115 O of the Income Tax Act.
This DDT has been abolished, and the taxation is now shifted from the companies to the individual stakeholders. Post the abolition of the DDT, the taxability of dividends is liable to be paid for by the individual investors themselves, which was previously paid by the company.
TDS on dividend income
TDS means Tax Deducted at Source. Under this process, the deductor liable to payment will deduct the tax right at the source and transfer the balance to the deductee. The TDS amount is remitted to the Central Government.
The normal rate of TDS earlier on dividend income in excess of Rs. 5,000 from a company or mutual fund stood at 10%. However, as a COVID-19 relief measure, the tax rate has been reduced to 7.5% from 14 May 2020 to 31 March 2021.
Advanced taxes and the submission of Form 15G/15H
Advanced taxes provisions are eligible for a taxpayer if their tax liability is equal to or more than Rs. 10,000 in a particular financial year. A resident taxpayer can submit form 15G/15H to ensure that TDS is not deducted on interest if their dividend income is not taxable.
Forms 15G and 15H are self-declaration forms one can fill up and submit requesting their exemption from TDS as the income falls below the taxable limits. The taxpayers can directly submit the forms to the company they have been receiving the dividends from.
Provisions for dividends received from a foreign company
Dividends received from a foreign company are taxable since it is charged as “income under other sources.” Foreign company dividends will be taxable at the rates which apply to the taxpayer. For example, if the taxpayer has a 20% tax slab, then the dividend will also be taxable at a 20% interest rate.
However, the compulsory deduction of TDS as per Section 194 of the Income Tax Act is still applicable.
Exemption from double taxation
The dividends received by the shareholder from the foreign company get taxed both in the domestic country as well as the country of operation. To avoid double taxation, the taxpayer can claim relief or exemption from the double taxation as per Section 91 of the Income Tax Act (if any such agreement is included) or by the Double Taxation Avoidance Agreement. The DTAA is provided by both countries in order to exempt the double taxability situation for the smooth running of economic trade.
Applicable taxable slabs on dividend incomes are henceforth shifted from the company’s hands to the individual taxpayers. Now that the regulations have been changed with a new and updated mode of taxable dividends, having knowledge of the rates and concessions will help you file your next ITR smoothly. You will also be able to keep an eye on evading double taxation and saving TDS. Consult your CA/tax advisor for professional advice on taxes.