How are dividends taxed in India?

Dividends are a form of income earned by shareholders of a company, which is distributed as a share of the company's profit. In India, the taxation of dividends has undergone significant changes over the years. The way dividends are taxed depends on whether the company paying the dividend is a resident or non-resident entity, as well as the total income of the shareholder.

1. How Are Dividends Taxed in India?

In India, dividends received by individuals are taxed under the head "Income from Other Sources". Since the **Dividend Distribution Tax (DDT)** was abolished in 2020, the responsibility for paying tax on dividends lies with the shareholders.

The income from dividends is added to your total taxable income and taxed as per the income tax slab applicable to you. The tax rates vary depending on your total income, and this includes any dividend income you may have received during the year.

2. Tax Rates on Dividend Income

Dividend income is taxed based on your total income, and the rate depends on your income tax bracket. The following are the income tax rates applicable to dividend income:

• For income up to ₹2.5 lakh: No tax is payable on the dividend income, as it falls within the basic exemption limit.
• For income between ₹2.5 lakh to ₹5 lakh: Dividend income is taxed at 5% after considering the rebate under Section 87A, if applicable.
• For income between ₹5 lakh to ₹10 lakh: Dividend income is taxed at 20%.
• For income above ₹10 lakh: Dividend income is taxed at 30%.

3. Tax Deducted at Source (TDS) on Dividends

Companies paying dividends are required to deduct **Tax at Source (TDS)** on the dividend amount. The TDS rate depends on whether the recipient is a resident or non-resident:

• For Resident Individuals: TDS is deducted at 10% if the dividend income exceeds ₹5,000 in a financial year.
• For Non-Resident Individuals: The TDS rate is 20%, unless a lower rate is specified under a Double Taxation Avoidance Agreement (DTAA) between India and the resident's country.

If your total dividend income is less than ₹5,000 in a financial year, no TDS will be deducted. However, you are still required to report this income in your tax return and pay tax as per your applicable slab rate.

4. Exemptions and Rebates

Some exemptions and rebates may apply to dividend income in certain cases:

• For Senior Citizens: Senior citizens (aged 60 years or more) are entitled to a tax exemption on dividend income up to ₹50,000 per year.
• Section 87A Rebate: If your total income is below ₹5 lakh, you may be eligible for a rebate under Section 87A, which can reduce your tax liability on dividend income.

5. How to Report Dividend Income in Your Tax Return

Dividend income must be reported while filing your Income Tax Return (ITR). Even if TDS has been deducted, you need to mention the total amount of dividends received in the appropriate section of the ITR form.

• For Resident Individuals: If TDS is deducted, you can claim credit for the TDS paid against your final tax liability when filing your return.
• For Non-Residents: Non-resident taxpayers should report dividend income under the "Income from Other Sources" section and apply any applicable DTAA benefits to lower the TDS rate.

6. Conclusion

In conclusion, dividends are taxed in India based on your income tax slab, and the companies are required to deduct TDS before paying the dividend. It is essential to report dividend income accurately in your tax return to ensure compliance with tax laws. Be aware of the exemptions and rebates available for senior citizens and those with low income.