How Dividend Income Is Taxed in India?

Introduction

Dividends are also among the most widely used passive income instruments for a lot of Indian investors. Dividends are a share of profit of a company paid out to its shareholders as payment, usually in intervals. What most investors forget is that dividend income is no longer tax-free anymore. Ever since the abolition of the Dividend Distribution Tax (DDT) in India, 2020, dividends are taxed in the hands of the investor.

In this article, we analyze how dividend income is taxed in India, tax rate applicable, how you can claim it during ITR filing, and some tips to allow you to pay less tax legally.

What Is Dividend Income?

Dividend income is what you get as a shareholder when the company pays out its profits. Indian list companies can pay out two types of dividends:

Interim Dividend - announced during the financial year

Final Dividend - announced subsequent to the financial year, after shareholders' approval

Dividend income can provide a constant source of earnings, especially when invested in such companies that return a steady dividend to their investors. One needs to see how such income is taxed under current laws as well.

How Dividend Tax Transformed?

Pre-2020: Dividend Distribution Tax (DDT)

Up to 31st March 2020, the incidence of tax on dividend distribution rested with the companies and not with the investors. It was called Dividend Distribution Tax or DDT. Under this regime, the companies would pay DDT at an effective rate of about 17.65% before they distributed dividends to the shareholders. The so-paid dividend to the investors was exempted from tax. But there was an additional 10% tax on the high-net-worth persons whose dividend income was over ₹10 lakh in a year of income under Section 115BBDA.

Post-2020: Investors' Tax

The taxation regime totally transformed after the Finance Act 2020. With effect from April 1, 2020, Dividend Distribution Tax in India was abolished, and the tax was shifted from the company to the investor. As per the new system, dividend income forms a part of the overall taxable income of the investor and is taxed at the slab rate applicable to it. Even the Section 115BBDA provision, which earlier used to impose higher tax on high-income earners of dividend, was invalidated. This made the system transparent but more expensive for most individual investors, especially higher-income groups.

How Dividend Income Is Taxed Today?

1. Slab-Based Income Tax

For resident individuals and HUFs, dividend income is to be added to total income and taxed as per the relevant income tax slab:

Total Income Range	Tax Rate
Up to ₹2.5 lakhs	Nil
₹2.5 lakhs - ₹5 lakhs	5%
₹5 lakhs - ₹10 lakhs	20%
Above ₹10 lakhs	30%

2. Tax Deducted at Source (TDS)

Dividend income is to be withheld by companies and paid to the shareholders prior to deducting TDS as per the following rules:

• 10% TDS is payable if aggregate dividend is ₹5,000 or more in the financial year (per company).
• If PAN is not furnished by the investor, TDS is deducted at 20%,
• For NRIs, TDS is deducted at 20% (along with surcharge), subject to DTAA.
• The TDS can be recovered as final tax payment and can be done at the time of filing your tax return.

How to File Taxes for Dividends?

Whenever you receive dividend income, you need to report it to you in your Income Tax Return (ITR) in the "Income from Other Sources" section.

You need to go through these steps to do the same:

• Take the details of the dividend from broker statements or annual reports
• Consult Form 26AS to see the TDS deducted by the companies
• Enter the gross dividend income in your ITR in the right section
• Take credit of TDS to avoid double taxation
• Deposit any excess tax according to your slab
• Payment of tax on time keeps you in good books and avoids notice from the Income Tax Department.

How to save tax on dividend income?

Even though you can't avoid paying tax on dividend, there are some legal ways to save your tax expenditure:

1. Submit Form 15G or 15H

If you have a total income that is below the basic exemption limit, you can complete Form 15G (for persons below 60 years) or Form 15H (for senior citizens) and send it to the company or registrar. No TDS will be withheld.

2. Claim Interest Deduction

If you took out a loan to invest in shares, you can claim interest expense under the category "Income from Other Sources". But relief is only up to 20% of dividend income. Example: If your dividend income is ₹20,000. You can claim a maximum of ₹4,000 as interest expense.

3. Take DTAA Provisions (For NRIs)

If you are an NRI, check if your nation has a Double Taxation Avoidance Agreement with India. You may be entitled to relief for claiming lower tax or credit for tax paid in India.

Dividend Tax Rate in India: Resident vs NRI

Following is a quick comparative overview of dividend income taxation by resident investors and NRIs:

Category	Tax Treatment
Resident	As per individual income tax slab
NRI	TDS at 20% (plus surcharge and cess), unless reduced under DTAA

Top Dividend Paying Companies in India

If you are interested in getting frequent dividend paybacks, there are some companies with a good history of paying dividends. Even though the dividend yields fluctuate from time to time, some of the best dividend paying companies in India (according to past performance) are:

• ITC Ltd.
• Coal India
• Hindustan Zinc
• Power Grid Corporation of India
• Infosys

Such companies are likely to be the choice of cash-strapped investors, for a good reason. But one has to look into the tax effect on the returns as well.

Some More Points to Remember

• Keep your dividend income in check throughout the year, if you have shares in more than one demat account.
• If your total tax liability is ₹10,000 or more, you must pay advance tax in quarterly installments to avoid interest under Section 234B and 234C.
• Foreign dividends (from foreign shares) are tax-able in India as "Income from Other Sources" and foreign tax credit may be availed if overseas tax is paid.

Conclusion

Since Dividend Distribution Tax has been removed, investors are the ones that must pay tax on dividend incomes. Although dividends are still an in-demand passive source of income, there must be some understanding of tax and relevant reporting. Being aware of your tax on dividend income in India and how to file taxes for dividends can avert penalties and optimize total returns. Tax on dividend income is preserved by investors legally and efficiently through smart planning such as deduction or DTAA benefits.

For those looking to go a step further in planning their finances, platforms like Indiabulls Securities Limited can help. With their market insights, investment tools, and user-friendly platforms, managing your portfolio while being tax-efficient becomes a lot easier.

FAQs

1. Is dividend income taxable in India?

Yes, dividend income is taxable in the hands of investors as per their applicable income tax slab.

2. Do I need to file ITR if I earn dividend income?

Yes, if your total income (including dividends) exceeds the basic exemption limit, you must file an Income Tax Return.

3. What is the TDS on dividend income?

TDS at 10% is applicable if the total dividend received from a company exceeds ₹5,000 in a financial year. If PAN is not submitted, TDS is deducted at 20%.

4. Can I claim any deductions on dividend income?

You can claim a deduction for interest expenses incurred to earn such income, subject to a limit of 20% of the dividend amount.

5. How are foreign dividends taxed in India?

Foreign dividends are also taxable in India under the head “Income from Other Sources” at your applicable slab rate. However, you may be eligible for a foreign tax credit.

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