Dividends have been a common source of passive income for investors but the tax rules governing them in India have changed significantly in recent years. With these shifts, understanding the taxation of dividend income, including TDS, is crucial. 

Before we delve into its tax implications, let’s understand what exactly dividend income is. 

Whenever a company earns a certain amount of profit, it has two choices. The first is to reinvest it in the company itself. This is referred to as a ‘retained earning’. The second choice is distributing it among the shareholders. These distributed earnings are known as dividend income.

Sources of Dividend Income: Dividend income can come from multiple sources, and each carries its own tax implications:

Domestic Company: Dividends earned from shares of an Indian company.

Foreign Company: Dividends received from investments made in overseas companies.

Equity Mutual Funds: Dividends paid under the payout option of equity funds.

Debt Mutual Funds: Dividends paid under the dividend payout option of debt funds.

Shift in Tax Rules for Dividend Income: Until FY 2019–20, dividends were tax-free for shareholders, while companies had to pay Dividend Distribution Tax (DDT) at a rate of 15% plus applicable surcharges and cess. But in the 2020 Union Budget this system was completely changed. FY 2020–21 onwards, companies no longer have to pay DDT, as the dividends are now taxed at shareholders end.

Tax Rates: The new process for taxation of dividend income is now based on the individual’s applicable income tax slab rate. Here’s how it works:

  • Dividend income for individual taxpayers is combined with their total income and taxed according to the applicable income-tax slab.

  • For NRIs, dividend income is generally taxed at a flat 20% (plus surcharge and cess). However, the rate may vary depending on the Double Taxation Avoidance Agreement (DTAA) between India and the NRI’s resident country.

  • For domestic companies, dividend income is taxed at the applicable corporate tax rate.

TDS on Dividend Income: Now that the dividends are taxable for shareholders, tax deduction at source (TDS) has been imposed:

  • Residents have to pay 10% TDS on dividend income exceeding ₹5,000 in a financial year. Dividends below INR 5,000 are exempted. 
  • NRIs are charged at 20% plus surcharge and cess, which might be reduced under DTAA.
  • No TDS is applicable if the dividend is from listed shares subject to securities transaction tax (STT). Also, if total income (including dividends) is below ₹2.5 lakh, the dividend is not taxable.

With the new rules, the companies are now free from both the financial burden and the related compliance requirements. As for shareholders, they must comply with the latest regulations on the taxation of dividend income, including TDS rules and the applicable tax rates. 

If the process seems complex, you can consult tax advisors like Corporate Leaps. You can get in touch with us at support@corporateleaps.com.

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