What is the tax on dividends in India?

If you are an investor receiving dividends from your investments, it’s important to understand how these earnings are taxed in India. The taxation of dividends has undergone significant changes in recent years, so let's break it down in simple terms.

1. Tax on Dividends in India: An Overview

Dividend income in India is subject to tax. However, the way it is taxed depends on whether the dividend is received from an Indian company or a foreign company, and whether the amount exceeds a certain threshold. The taxation system has seen changes over the years, so it's important to understand the current rules to avoid any surprises during tax filing.

2. How Are Dividends Taxed in India?

Since the 2020-21 financial year, India no longer has the Dividend Distribution Tax (DDT), which was previously paid by companies before paying dividends to shareholders. Now, the tax on dividends is charged directly to the individual receiving the dividend income, according to their income tax slab rate.

If you receive dividends from an Indian company, it is considered "Income from Other Sources" under Section 56 of the Income Tax Act. The tax you pay on these dividends depends on your total taxable income.

3. Tax Rate on Dividends in India

The tax on dividend income is based on the income tax slab rates applicable to the individual’s total income. Here’s how the taxation works:

• If your total annual dividend income is less than ₹5,000, it is exempt from tax.
• If your total annual dividend income exceeds ₹5,000, you will be taxed based on your income tax slab rate.

For example, if you are in the 20% or 30% income tax bracket, your dividends will be taxed at those respective rates. The following is a general breakdown of the income tax slabs for individuals:

• Income up to ₹2.5 lakh: No tax (Exempt)
• Income from ₹2.5 lakh to ₹5 lakh: 5% tax
• Income from ₹5 lakh to ₹10 lakh: 20% tax
• Income above ₹10 lakh: 30% tax

4. TDS on Dividends

If you receive dividends of over ₹5,000 in a financial year, the company paying the dividend will deduct a Tax Deducted at Source (TDS) at the rate of 10%. The TDS amount is adjusted against your total tax liability, which you can claim while filing your income tax return (ITR).

However, the TDS rate is reduced to 7.5% for certain categories of individuals, like senior citizens (above 60 years). If you fall under a lower tax bracket or have no tax liability, you can apply for a lower TDS rate by submitting Form 15G (for individuals below 60 years) or Form 15H (for senior citizens).

5. Dividends from Foreign Companies

If you receive dividends from foreign companies, the taxation process is slightly different. These dividends are subject to tax in India, but the tax rate may vary depending on the Double Taxation Avoidance Agreement (DTAA) between India and the country from which the dividend is received.

In such cases, you may be eligible for tax credit or exemptions based on the provisions of the relevant DTAA, which can reduce your overall tax liability. You should consult a tax expert for details on how to claim these benefits.

6. Taxation for Corporates and HNIs

For corporate investors and high-net-worth individuals (HNIs), the tax on dividend income is more or less the same as for individual investors, except that they may have access to certain exemptions or rebates depending on the nature of their investments or their status. Corporate investors may also benefit from exemptions under specific sections like 10(34), which provides tax-free dividends received from a domestic company, subject to certain conditions.

7. Conclusion

In conclusion, the tax on dividends in India is relatively straightforward, but it is essential to understand how your dividend income will be taxed based on your total income. Whether you receive dividends from Indian or foreign companies, the key to minimizing your tax liability is staying informed about the rules and using available exemptions or deductions wherever possible.

If you’re looking to start investing and receive dividends from Indian or foreign companies, it's crucial to ensure that your investments align with your tax planning strategies.