How is dividend income taxed?

Date : 22/07/2020
Read: 3 mins

Confused about the tax implications of your dividend income? Here’s everything you need to know about it.

Dividend income is that part of a company’s earnings that it distributes to the people who own shares or mutual funds in that particular company. Investors and shareholders will undoubtedly be familiar with its benefits. However; there is often a degree of uncertainty about its tax implications and consequences.

One can earn dividend income from various channels such as stocks, mutual funds etc. An important point to note is that dividend incomes derived from different channels are taxed differently. But that’s not all; there are further divisions in the taxation of dividend income.

Dividend income earned from companies listed in India is taxed differently compared to that of companies listed abroad. Also, there are different tax rules for dividends earned from equity and dividends earned from mutual funds. Even within mutual funds, there are different rules regarding dividend distribution tax on equity mutual funds and on debt-scheme mutual funds.

Amidst such varied rules regarding the treatment of dividend income, it is imperative to understand their tax consequences while making investment decisions.

Dividend income from stocks

As per the Income Tax provisions, if the amount of dividend income earned from domestic companies exceeds Rs 10 lakh, the individual is liable to pay tax on the amount exceeding Rs 10 lakh at the rate of 10%.

The rules are different for dividend earned from foreign-listed companies, as that dividend income is subject to tax in the hands of the individual. It is considered ‘Income from other sources’ and the rate of tax is in accordance with the income tax slab of the individual.

Domestic companies listed in India are liable to pay Dividend Distribution Tax at the rate of 15% before distributing the dividend to investors. However, a foreign company not listed in India is not subjected to the payment of Dividend Distribution Tax.

Dividend income from mutual funds

Investors are not required to pay tax on dividends earned from mutual funds, irrespective of whether it is a debt mutual fund scheme or an equity mutual fund scheme. Investors are fully exempted from tax on the dividend income earned from mutual funds.

The tax rules for mutual fund companies regarding Dividend Distribution Tax can vary. The dividends distributed by debt mutual fund companies are subject to payment of tax at the rate of 29.12%, inclusive of surcharge and cess. Similarly, the Dividend Distribution Tax payable by equity mutual fund companies is at the rate of 11.64%, inclusive of surcharge and cess.

Conclusion

Taxation plays an important role while making decisions regarding investments. Thus, one must know the tax implications of their dividend income as it helps in analysing which option is best suited for investment. This would also help in advance tax planning.