Income Tax on Dividend Income: Equity Shares & Equity Mutual Funds

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Sakshi Shah

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Income Tax

Earlier, dividend income was exempt from tax in the hands of the shareholder. A dividend means the distribution of profits by a company to its shareholders. After the introduction of Budget 2020, dividend income is now taxable in the hands of the shareholder; and is also subject to TDS @ 10% in excess of Rs. 5000. Below is the detailed understanding of the taxability of dividends from equity shares, equity mutual funds; and TDS applicability on dividend income.

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Income Tax on Dividend Income from Equity Shares

Upto FY 2019-20

As per Section 115-O, a Domestic Company pays DDT at 15% on the dividend distributed to the resident shareholders. Therefore, the Shareholder’s Dividend Income (up to Rs.10 lacs) was exempt u/s 10(34). TDS was not applicable to dividends since the income was not taxable in the hands of the shareholder.

FY 2020-21 Onwards

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

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

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Income Tax on Dividend Income from Mutual Funds

Upto FY 2019-20

As per Section 115-O, when a Domestic Company distributed dividend on Equity Mutual Funds, it was liable to pay DDT (Dividend Distribution Tax) @ 15%. Since the Company paid DDT, Dividend Income was exempt (up to Rs.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 DDT (Dividend Distribution Tax). Thus, a Domestic Company is not liable to pay DDT on the dividend distributed on Equity Mutual Funds. Since DDT is not paid by the Company, Dividend 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 dividend on equity mutual funds to a resident shareholder should deduct TDS at the rate of 10% if the dividend exceeds Rs. 5000. The taxpayer should report dividend income under the head IFOS in the ITR filed on Income Tax Website.

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Income 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 dividend 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 dividend from equity shares at 10% if the dividend income per recipient exceeds Rs. 5000 in the financial year

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