How are dividends taxed in India?

In India, dividends are subject to tax. The taxation of dividends has undergone significant changes over the years. Let’s explore how dividends are taxed in India and the implications for investors.

1. Dividend Taxation in India: Overview

In India, dividends are considered income, and they are taxable as per the tax laws. Earlier, the company declaring the dividend had to pay a Dividend Distribution Tax (DDT) on the amount paid to shareholders. However, the Finance Act 2020 abolished the DDT system and shifted the responsibility of paying tax on dividends to the investors themselves.

2. Tax Rate on Dividends in India

As per the current tax system, dividends are taxed based on the investor’s income tax slab. The tax on dividends is levied under the head 'Income from Other Sources'. The tax rates on dividends are as follows:

• For Individual Investors: The dividend income is added to the investor’s total income and taxed at the applicable income tax slab rates, ranging from 0% to 30% (depending on the income level).
• For Senior Citizens (aged 60 years or above): Senior citizens enjoy a basic exemption limit of ₹3,00,000. So, if their total income (including dividends) is below this limit, they are not liable to pay tax.
• For Hindu Undivided Families (HUFs): The tax on dividends for HUFs is also levied according to the income tax slab of the family, just like individual investors.

It’s important to note that no tax is deducted at source (TDS) on dividend income if it is below ₹5,000 in a financial year. However, if the dividend income exceeds ₹5,000, the company paying the dividend will deduct TDS at the rate of 10% before transferring the dividend to the shareholder. This TDS can be adjusted against the final tax liability.

3. Taxation of Dividend in Case of Non-Residents

For non-resident Indian (NRI) investors, the tax rate on dividend income is generally 20% (plus surcharge and cess). However, the tax rate may vary based on the Double Taxation Avoidance Agreement (DTAA) between India and the investor’s country of residence.

If the NRI's home country has a DTAA with India, they may be eligible for a reduced tax rate on dividend income. In such cases, the investor will need to provide the necessary documents to the company paying the dividend, such as the Tax Residency Certificate (TRC), to avail of the benefits of the DTAA.

4. Tax Filing for Dividend Income

Investors must report their dividend income while filing their income tax returns. Even if the company deducts TDS, the investor is still required to report the dividend income in their tax return. If the total tax paid (including TDS) is higher than the actual tax liability, the investor may be eligible for a refund from the government.

It’s crucial to ensure that all dividend income is properly reported to avoid any penalties or legal issues. The investor should also ensure that the TDS deducted by the company is reflected in the Form 26AS (a statement showing details of taxes deducted and paid on behalf of the taxpayer).

5. Conclusion

To sum up, in India, dividends are taxed based on your income tax slab. While the taxation of dividends has shifted responsibility from companies to investors, it's important to keep track of your dividend income, any TDS deducted, and file your taxes accurately to avoid penalties. Non-residents need to consider the tax implications and the DTAA benefits available between India and their country of residence.