Tax on dividend income from shares for resident and non-resident shareholders

Dividend income is taxed differently for resident and non-resident shareholders.

How much tax do you pay on dividend income from shares

As an investor, you will no doubt be receiving dividend income on your stocks from time to time. This dividend income is taxable in the hands of the shareholder effective 1 April 2020, owing to the changes in the tax regime under the Finance Act 2020.

Previously, tax on dividend was to be paid by the dividend issuing company as Dividend Distribution Tax (DDT) at the rate of 20.56% and the proceeds were exempt from tax in the hands of shareholders. 

The amendment has reintroduced the classical system of dividend taxation, wherein the liability is to be fulfilled by the shareholders and the company declaring the dividend is required to withhold the taxes thereon.

Tax obligation on dividend for domestic shareholders

For resident shareholders, dividend income from stocks held as investment is taxable under the head of ‘Other Income’ at the applicable tax slab, irrespective of the amount received. Further, under Section 194 of the IT Act, tax will be deducted at source (TDS) at 10% if the dividend income exceeds Rs 5000 in a financial year. 

However owing to the financial repercussions brought on by the COVID-19 pandemic, the rate of TDS has been reduced to 7.5% instead of 10% for dividends paid out between 14.05.2020 and 31.03.2021 only.

In case the stocks are held for trading purposes, the dividend is treated as ‘Business Income’ and taxed accordingly. In such cases, the assessee can also claim deduction in lieu of expenses incurred to earn the dividend income, such as interest on loan, collection charges, etc. However, the claim cannot exceed 20% of the total dividend income.

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Tax implications on dividend for NRIs

Investors classified as non-residents will have tax withheld at the rate of 20% plus surcharge and a 4% health and education cess, as per Section 195 of the IT Act. The surcharge is nil for dividend income up to Rs 50 lakh and goes as high as 15% for dividend income above Rs 5 crore. 

The applicable tax rate will therefore vary between 20.8% and 28.5% for non-residents, depending on the total income and applicable rate of surcharge. A lower tax rate may be applicable if the benefit of Double Tax Avoidance Agreement (DTAA) is available to the investor.

In order to claim such benefits, non-resident shareholders may be required to furnish documents such as Tax Residency Certificate, Form 10F verified by the government of the country where the assessee is resident, and a self-declaration certificate. The applicable rate of tax is mentioned in the DTAA and will have to be claimed by the assessee by filing tax returns in India.

DTAA benefit is not available to Foreign Institutional Investors or Foreign Portfolio Investors as per section 196C/196D of the IT Act, and will see tax withheld at 20% on dividend received.

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Other factors to keep in mind

Accounting: It should be noted that interim dividend is taxable in the year when received by the shareholder, whereas final dividend is taxable in the year in which it is declared, distributed, or paid, whichever is earlier.

Furnishing PAN: Ensure that your PAN details are registered with the dividend issuing company. If PAN is not provided, the applicable rate of TDS doubles to 20%.

TDS: If any tax has been withheld (for dividend in excess of Rs 5,000), details of the same will be visible in your annual tax credit statement, that is Form 26AS.

Conclusion

Tax returns for FY 2020-21 have to be filed by the end of September 2021 and all you dividend income from stocks or mutual funds has to be accounted for. For ease of compliance, you can get details of all dividend income received during the previous financial year pre-filled in your Income Tax form. This can be downloaded from the IT portal.

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