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 pays DDT i.e. Dividend Distribution Tax on payment of dividends. Thus, it was 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.
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. Foreign Dividend is taxable at slab rates. TDS is not applicable to such dividends.
After the abolishment of DDT under Budget 2020, 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. 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 the detailed understanding of the tax on dividend income in India from equity shares, equity mutual funds; and TDS applicability.
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 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 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.
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 DDT on the dividends distributed on Equity Shares to shareholder resident in India. Dividends 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, 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.
As per Section 115-O, when a Domestic Company distributed dividend on Equity Mutual Funds, it was liable to pay DDT at 15%. Since the Company paid DDT, 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.
Under Budget 2020, the Finance Minister removed Section 115-O and abolished DDT. 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, 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.
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.
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.
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