TDS Getting Deducted Despite Zero Tax Liability? Here’s How You Can Avoid It

An article on how to avoid TDS deductions on dividend income if you do not have a tax liability

 TDS deductions
  • Origin of income tax on dividends
  • TDS applicability to dividend income
  • How to avoid TDS deduction?

Earlier, companies that declared dividends in India were liable to pay dividend distribution tax (DDT). However, this tax was abolished in 2020. The Finance Act 2020 transferred the taxability to the hands of the dividend recipients, i.e., individual investors. Taxability automatically brought the provisions of TDS into the picture.

However, what if you are not liable for income tax during the year but receive dividends from equity shares or mutual funds? Read on to find out.

Also Read: Too Much TDS Deducted? Here’s How to Claim Your TDS Refund Online

Taxable dividend income

For the investor, dividend income was exempt until 31 March 2020. With the withdrawal of DDT, investors and shareholders were taxed on the dividend income. But how much of a dividend is tax-free? Presently, if the dividend income received from a company or a mutual fund exceeds Rs 5,000, a TDS of 10% would be applicable to such a dividend amount. Between 14 May 2020 and 31 March 2021, the TDS rate was reduced to 7.5% as a part of COVID-19 relaxations.

TDS on dividend income is charged at 20% for non-residents, depending on the double taxation avoidance agreement in place.

While implementing the tax on dividend income, the Finance Act 2020 also allowed deductions for the expenses incurred to earn the dividend income. The deduction can be a maximum of 20% of the dividend income received.

Also Read: Union Budget 2023 Reduces TDS On EPF Withdrawals. Here’s What You Need to Know

Avoiding the TDS deduction

For shareholders and investors who fall below the tax bracket, this TDS deduction can unnecessarily block the money from dividend disbursal until the person’s assessment. However, such investors can avoid the TDS deduction and receive the full dividend amount.

Forms 15G and 15H are self-declaration forms submitted by a taxpayer to the bank, requesting the latter not to deduct TDS. In some banks, these forms can also be submitted online.

Form 15G can be submitted by resident individuals, HUFs, trusts, etc. It cannot be filed by a company or a firm, and there is an age limit of 60 years in the case of individual applicants. Form 15H can be submitted by senior citizens only, i.e., resident individuals aged 60 years or more. Only residents can submit these forms. The estimated tax liability for the financial year must be nil in the case of both forms.

Forms 15G and 15H are valid for one financial year. Therefore, it must be submitted at the beginning of every new financial year.

Also Read: Union Budget 2023: Rules For TDS and Share Issuance Changed For NRIs. Here’s What’s New

With no tax on annual income of up to Rs 7 lakh under the new income tax regime, many dividend recipients may fall below the tax exemption limit this financial year. Using these two forms will help them avoid TDS deductions on dividends received from shares and mutual funds.



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