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 domestic company used to pay DDT – Dividend Distribution Tax on payment of dividends. Thus, domestic dividend income was exempt in the hands of the shareholder under Section 10(34) of the 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 at slab rates. Further, the domestic dividend 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 & Union Budget 2021
After the abolishment of the Dividend Distribution Tax under Budget 2020, from FY 2020-21, the dividend which was earlier exempt now became a taxable income. Under Budget 2020, the finance minister introduced TDS under Section 194 and Section 194K for deduction of TDS on dividend paid on equity shares and equity mutual funds. Under Budget 2021, the dividend paid to REIT / InvIT is now exempt from TDS.
It is difficult for the shareholders to estimate the dividend income accurately. Thus, Advance Tax liability would arise on dividend income only once the company declares and pays the dividend.
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 paid a Dividend Distribution Tax of 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). If the dividend amount exceeded INR 10 lacs, it was a taxable income and taxed at slab rates 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 was a taxable income under the head Income from Other Sources i.e. IFOS since the company did not pay DDT on such dividend.
FY 2020-21 Onwards
Under Budget 2020, the removal of Section 115-O led to the abolishment of the DDT. Thus, a Domestic Company was not liable to pay tax on the dividends distributed on equity shares to shareholder residents in India. As a result, the dividends would be taxable in the hands of the shareholder at applicable slab rates. Since the income is taxable in the hands of the shareholder, TDS would be applicable. As a result, the finance minister amended the existing Section 194.
As per Section 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) for 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 the company does not pay DDT, the 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 Section 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.
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, the payer should deduct TDS at the rate of 10% under Section 194 or Section 194K.
Section 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 the payer should deduct TDS under section 194K at a rate of 10% on Dividend Income only and not on Capital Gains on the sale of Equity Mutual Funds.
The prescribed limit to deduct TDS on dividend income is INR 5000.
Sec 194K – Domestic Company should deduct TDS on dividends from mutual funds at 10% if the dividend income per recipient exceeds INR 5000 in the financial year.
Sec 194 – Domestic Company should deduct TDS on dividends from equity shares at 10% if the dividend income per recipient exceeds INR 5000 in the financial year.
I am an F&O Trader and also derive income from interest on deposits, rent and dividends. I understand that F&O trading income is reported as business income and the rest are reported as income from other sources. Since all these attract tax at the individuals’ slab rates, can I aggregate these and claim expenses incurred in F&O trading, and pay tax on the net, even if the trading activity resulted in a loss?
FnO is a non-speculative business income, taxed under Income from Business & Profession, interest on deposits & dividends are taxed under IFOS and rental income is taxed under Income from House Property.
Yes, true, all the incomes are taxed at the slab rates, but set off and carry forward of loss under different income heads have different rules.
You can set off your FnO losses in the current year against all incomes except salary and pay tax on the income after setting off. In future years, it can be set off against business income (both speculative and non-speculative). The loss can be carried forward for 8 years.
Hope this helps.
Any dividend income earned during the financial year should be reported, irrespective TDS has been deducted or not. Dividend income is reported under the “IFOS” head and taxed at the applicable slab rate.
Is the above applicable only if loss on F&O business still exists for that year after setting off against all incomes except salary?
Yes, FnO losses in the current year can be set off against all incomes except salary. If still, any losses remain, it can be carried forward for 8 years after set off.
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