Understanding the Taxation of Dividend Income in India
In this article, we delve deep into the complexities of how dividend income is taxed in India. We discuss the exemption rules, tax rates, and deductions associated with dividend income, helping you navigate the tax obligations efficiently.Introduction to Dividend Income Taxation
The taxation of dividend income in India varies based on whether the shareholder is a trader or an investor. Understanding these rules is crucial for both individuals and corporations. Whether your dividend income is from domestic or international companies, it is subject to taxation under specific categories.
Current Status of Dividend Exemptions in India
For the fiscal year 2022-23, no amount of dividend income is exempt from income tax in India. All dividends, regardless of source, are taxable at slab rates applicable to Indian residents. This means that all dividend income received is added to your total income and taxed according to the slab rates.
Dividend Income as Revenue Generating Activities
Dividend income is categorized based on whether it is earned from trading activities or investment activities. If shares are held for trading purposes, the dividend income is taxed under the heading of 'income from business or profession.' On the other hand, if shares are held as an investment, the dividend income is taxed under the heading of 'income from other sources.'
Claiming Tax Deductions for Dividend Income
The allowance for tax deductions on dividend income is conditional and can vary. For dividend income taxed as business income, all expenses related to earning the dividend can be claimed, such as collection fees and interest on loans. However, for dividend income taxed as income from other sources, only up to 20% of the total dividend income can be claimed as deductions for interest expenses.
Interest Expenses and Deductions
For instance, if Mr. Ravi borrowed money to invest in equity shares and paid Rs. 2700 in interest during FY 2021-22, he can only claim a deduction of Rs. 1200 (20% of the dividend income). Any other expenses such as commissions or salary expenses are not tax-deductible.
TAXATION DATES AND TRADING HEALTH
The timing of when dividend income is taxable is important. According to Section 8 of the Indian Income Tax Act, final dividends, including deemed dividends, are taxable in the year they are declared, distributed, or paid by the company, whichever comes first. Similarly, interim dividends are taxable in the year the amount is made available to shareholders.
Tax Deduction at Source (TDS) on Dividend Income
Tax Deduction at Source (TDS) applies to dividends distributed on or after April 1, 2020. Indian companies deduct tax at a rate of 10% from dividends paid to resident shareholders, provided the total dividend amount for the year exceeds Rs. 5000. No TDS is applied to dividends paid to life insurance companies or general insurance companies.
Non-Resident TDS
For non-resident or foreign firms, the tax is deducted under Section 195, according to the relevant double tax avoidance agreement (DTAA).
Simplified Taxation with Forms 15G and 15H
For those eligible, forms 15G and 15H can be used to exempt dividend income from TDS. Individuals whose projected annual income is below the exemption limit can submit Form 15G to the company or mutual fund paying the dividend. Similarly, elderly citizens with no expected annual tax liability can file Form 15H.
Impact on Advance Tax with Dividend Income
If there is a shortage in advance tax payments due to dividend income, no interest is charged under Section 234C, provided the full amount is paid in future advance tax installments. However, this waiver does not apply to 'presumed dividend' as defined in Section 222 e.
In conclusion, the taxation of dividend income in India involves a blend of tax exemptions, rates, and deductions. Understanding these intricacies is crucial for managing your financial obligations effectively. It is advisable to consult a tax professional for personalized advice tailored to your individual circumstances.