If you are a taxpayer and invests in a company, then you must be confused on how to treat dividend income while filing Income Tax Returns. Before FY 2020-21, Dividend income received from Indian companies was exempted from tax due to a provision, Dividend Distribution Tax [DDT]. According to this provision, Indian companies declaring dividend pays tax before making payment to shareholders.
However, from FY 2020-21, this provision has been eliminated from the Indian Income Tax Act. Therefore, all dividends declared/distributed by an Indian company on or after 1st April 2020 is taxable in the hands of the investor/shareholder. Also, Tax Deducted at Source [TDS] has been introduced on dividend distributed by companies and mutual funds on or after 1s April 2020. The rate of TDS is 10% (but reduced to 7.5% from 14th May 2020 up till 31st march 2021 due to Covid) on dividend income excess to Rs.5000 in a year. For example, X received a dividend income of Rs. 7000 from an Indian company. Since, threshold limit is Rs.5000, so TDS @ 10% will be applicable on Rs.2000 (7000-5000) i.e. Rs. 200 will be deducted from dividend income and X will get the remaining amount of Rs. 6800 as a dividend.
Further, dividend income received is a taxable income in the hands of investor/shareholder and tax on this income will be deducted on their respective applicable income slab rates. That means, for X who received Rs.6800 as dividend income and if he falls under the tax slab rate of 30% then this dividend income will also be taxed at the rate of 30% under ‘Income from other Sources’ head.
The Finance Act 2020 also provides a deduction of interest expenses incurred for dividend income. But the deduction amount cannot exceed 20% of the gross dividend income received. Also, an individual is not entitled to claim a deduction for any other expenditure incurred to earn a dividend. That means, if X had borrowed money to invest in a company and had paid Rs. 2000 as interest then he is allowed to claim a maximum of Rs. 1400 (20% of Rs. 7000) as a deduction from his dividend income.
But here’s the catch, if the investor does not have a taxable income or investor is a senior citizen whose estimated tax liability is nill, then he can submit form 15G (for an individual) and 15H (for senior citizen) to the company and no TDS will be on dividend income.
If the investor receives a dividend from a foreign company, then that dividend income will also be taxable under the head ‘Income from other Sources’. He can also apply for a deduction on interest expenses upto 20% of his gross Dividend income. Dividend received from the foreign company gets taxed in both countries. So, an investor can claim relief either as a provision of a double taxation avoidance agreement or as per Section 91 (if no agreement exists). That means the investor does not have to pay tax twice on dividend income.