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Tax on Dividend Income & its Treatment

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Sakshi Shah

income from trading
Income Tax
Last updated on May 11th, 2021

A dividend means the distribution of profits by a company to its shareholders. It is different from interest. While interest is paid regularly, the dividends are paid only when the Company decides to pay. It is usually paid when a Company is earning profits. The Company used to DDT -Dividend Distribution Tax on payment of dividends. Making dividend exempt in the hands of the shareholder under Section 10(34) of Income Tax Act. The dividend received from a Domestic Company is a Domestic Dividend while that received from a Foreign Company is a Foreign Dividend, and should be reported under the head Income from other sources.

The tax treatment of foreign dividends is different from domestic dividends. Earlier, domestic dividend income was exempt from tax in the hands of the shareholder. After the introduction of Budget 2020, dividend income is now taxable in the hands of the shareholder; and is also subject to TDS at 10% in excess of INR 5000 u/s 194 & 194K. Foreign Dividend is taxable at slab rates. TDS is not applicable to such dividends.

Update on Tax on Dividend in Union Budget 2020 & Budget 2021

After the abolishment of Dividend Tax under Budget 2020, from FY 2020-21 dividend which was earlier exempt now became a taxable income. Under Budget 2020, TDS under Section 194 and Section 194K was introduced for deduction of TDS on dividend paid on equity shares and equity mutual funds. After Under Budget 2021, dividend paid to REIT / InvIT is now exempt from TDS.

Advance Tax liability would arise on dividend income only once the dividend is declared or paid since it is difficult for the shareholders to estimate the dividend income accurately.

Below is a detailed understanding of the tax on dividend income in India from equity shares, equity mutual funds; and TDS applicability.

Tax on Dividend Income from Equity Shares

Upto FY 2019-20

As per Section 115-O, a Domestic Company pays Dividend Tax at 15% on the dividend distributed to the resident shareholders. Therefore, the Shareholder’s Dividend Income (up to INR 10 lacs) was exempt u/s 10(34). There would be Dividend Tax at slab rates if the amount is in excess of INR 10 lacs as per Section 115BBDA of the Income Tax Act. TDS was not applicable to dividends since the income was not taxable in the hands of the shareholder.

Foreign Dividend is a taxable income under the head Income from Other Sources i.e. IFOS.

FY 2020-21 Onwards

Under Budget 2020, the removal of Section 115-O led to the abolishment of the DDT. Thus, a Domestic Company is not liable to pay tax on the dividends distributed on Equity Shares to shareholder residents in India. Dividends would be taxable in the hands of the shareholder (as per applicable slab rates). Since the income is taxable in the hands of the shareholder, TDS would be applicable. As a result, existing Section 194 was amended.

As per Sec 194, a Domestic Company distributing dividends to a resident should deduct TDS at a rate of 10% if the amount exceeds INR 5000. The taxpayer should report such income under the head IFOS in the ITR filed on Income Tax Website.

Tax on Dividend Income from Mutual Funds

Upto FY 2019-20

As per Section 115-O, when a Domestic Company distributed dividends on Equity Mutual Funds, it was liable to pay Dividend Tax at 15%. Since the Company paid the tax, dividend income was exempt (up to INR 10 lacs) u/s 10(34) in the hands of the investor. Since the income was not taxable in the hands of the shareholder, there was no applicability of TDS.

FY 2020-21 Onwards

Under Budget 2020, the Finance Minister removed Section 115-O and abolished Tax on Dividend. Thus, a Domestic Company is not liable to pay tax on the dividend distributed on Equity Mutual Funds. Since this tax is not paid by the company, such income on Equity Mutual Funds becomes taxable in the hands of the investor as per applicable slab rates. Since the income would be taxable in the hands of the investor, TDS would be applicable. As a result, the Finance Minister introduced a new Section 194K.

As per Sec 194K, a Domestic Company distributing dividends on equity mutual funds to a resident shareholder should deduct TDS at the rate of 10% if the amount exceeds INR 5000. The taxpayer should report such income under the head IFOS in the ITR filed on Income Tax Website.

Tax on Dividend Income
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FAQs

Is TDS deducted on dividend paid to a non-resident shareholder?

Yes. Domestic Company distributing dividends to a shareholder not resident in India should deduct TDS at the prescribed rates as per Section 195 of the Income Tax Act. In the case of a resident shareholder, TDS should be deducted at the rate of Sec 194 or Sec 194K.

Is TDS required to be deducted under Sec 194K on the sale of mutual funds?

The Sec 194K i.e. TDS on Income from Mutual Funds was introduced under Budget 2020. There was confusion about whether ‘Income from Mutual Funds’ would include capital gains on the sale of mutual funds or not. However, CBDT issued a clarification that TDS under section 194K should be deducted @ 10% on Dividend Income only and not on Capital Gains on the sale of Equity Mutual Funds.

What is the prescribed limit of dividend for deduction of TDS under Sec 194K?

The prescribed limit to deduct TDS on dividend income is Rs. 5000.
Sec 194K – Domestic Company should TDS on dividends from mutual funds at 10% if the dividend income per recipient exceeds Rs. 5000 in the financial year
Sec 194 – Domestic Company should TDS on dividends from equity shares at 10% if the dividend income per recipient exceeds Rs. 5000 in the financial year

Got Questions? Ask Away!

  1. Hey @Rachit_Awasthi1,

    Under Budget 2020, the Finance Minister abolished Dividend Distribution Tax i.e. DDT. As a result, dividend became a taxable income. Since it was now taxable, TDS would be applicable on it. Thus, the Budget also introduced the provision to deduct TDS on the dividend.

    • Sec 194 - A Company should deduct TDS at 10% on dividend paid on equity shares if the dividend amount exceeds INR 5,000. For FY 2019-20, this rate is reduced to 7.5%
    • Sec 194K - An AMC should deduct TDS at 10% on dividend paid on equity mutual funds if the dividend amount exceeds INR 5,000. For FY 2019-20, this rate is reduced to 7.5%

    TDS (Tax Deducted at Source) is applicable to many taxable incomes such as salary, professional fees, interest, commission etc. Since dividend income is a taxable income, TDS is applicable to it.

    You can claim the credit of deducted TDS as taxes already paid when you file your Income Tax Return. If the tax liability is more than TDS credit, you need to pay only differential tax. If the tax liability is less than TDS credit, you can claim a refund of the excess amount.

    If you have received an email for dividend you can know more about TDS on dividend paid in FY 2020-21 in the article mentioned below.

  2. I am salaried person, gross income 10 lakh and comes in individual resident category. I invested in share market and also get dividend 8000. But i am confused that how much dividend amount is tax-free in below options:

    1. TDS will be deducted at 10% on dividends received above INR 5000.

    2. Tax of 10% on dividend income in excess of Rs. 10 lakh per year.

    so which option is correct for current FY and option 2 is applicable to whom ?

  3. Option 2 of 10 lakhs applicable to which category ?

  4. Hey @Kuldeep_Singh,

    From AY 2021-22 onwards, dividend received by shareholder will be taxed in the hands of shareholders and not on company. Dividend is not tax free income and hence if total dividend exceeding of Rs. 5000 is liable to deduct TDS u/s 194 at the rate of 10%.

    Prior to AY 2021-22, tax on dividend was applicable to shareholders only when total amount exceeds 10 lakhs but now there’s no relevance of sec.115BBDA.

    For more understanding, you can refer below article for taxation on dividend income:

    Hope, it helps!

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