Taxation of Dividends Received on Shares in India

In India, the taxation of dividends received on shares is a topic of considerable interest, particularly for investors. This guide aims to provide a comprehensive overview of the tax implications and the recent changes in the tax laws regarding dividends in India.

Introduction to Dividend Taxation

The dividends received on shares in India are subject to a tax that rates at a flat rate of 10% if the total dividend received in an assessment year exceeds Rs 5000. This entry into the annual income of the shareholder is categorized under 'Income from other sources,' a section distinct from 'Salary' or 'Profits and gains of business' in the Income Tax Act 1961. As of the financial year (FY) 2020-21, details of such income must also appear in the Annual Information Statement (AIS) on the Income Tax portal for many taxpayers.

Historical Overview of Dividend Taxation

Before the Finance Act of 2020, dividends received from domestic companies were exempt in the hands of shareholders, as they were subject to the Dividend Distribution Tax (DDT) in the hands of the company. However, the Finance Act 2020 made a significant amendment to the Income-Tax Act 1961. The amendment abolished DDT and ended the exemption available to shareholders for dividends received on or after April 1, 2020. This significant change propelled the shareholder's obligation to pay taxes on dividends derived from domestic companies.

Taxation Process for Dividend Income

As of now, dividend income is taxable under the head 'Income from other sources.' The tax is levied on the dividend received, and the tax slab rates for the financial year 2020-21 (assessment year 2021-22) apply. Resident Indians face a TDS (Tax Deducted at Source) of 10% on dividends exceeding Rs 5000 from a company or mutual fund, under Section 194 of the Income Tax Act 1961. This TDS measure serves as a withholding tax on dividends.

However, due to COVID-19 relief measures, the government reduced the TDS rate to 7.5% from May 14, 2020, to March 31, 2021. It is important to note that despite the TDS, the dividend income is subject to the full income tax slab rates. Thus, if the total tax liability, including dividends, exceeds Rs 10,000 in a relevant financial year, you will need to pay Advance tax installments.

Visibility and Reporting of Dividends

Dividends received after April 1, 2020, will soon appear in the Annual Information Statement (AIS) and the TIS/Form 26AS. This is an essential part of the tax compliance process for investors. The AIS will automatically reflect the dividends received, regardless of whether TDS was deducted or not. This feature helps in the accurate reporting of dividends and ensures that the total tax liability is calculated correctly.

Exemptions and Forms to Submit

For resident individuals with an estimated annual income below the exemption limit, it is possible to submit Form 15G or 15H, for senior citizens, to the company or mutual fund paying the dividend. This form is necessary as it informs the shareholder about the dividend declaration on their registered email address. It is also a requirement for the company or mutual fund to submit this form to the tax authorities. This ensures that the TDS is not deducted, or the correct amount is deducted, as per the individual's tax status.

Conclusion

The tax laws surrounding dividends in India have seen significant changes in recent years. While the dividend income is still taxable under the 'Income from other sources' heading, the tax rate and processes have evolved to reflect the current economic scenario. Understanding these tax implications and staying informed about the latest changes is crucial for investors to navigate the tax landscape effectively.