What is the tax on dividends in India?

Dividends are one of the primary ways investors earn income from their investments in stocks. However, like all forms of income, dividend earnings are also subject to taxation in India. In this blog, we’ll take a look at how dividends are taxed, the rates that apply, and the changes that have occurred in recent years.

1. Understanding Dividend Taxation

In India, dividends received from domestic companies are taxable under the head 'Income from Other Sources'. However, it’s important to understand the key changes that have taken place in recent years regarding dividend taxation.

Prior to April 1, 2020, companies used to pay Dividend Distribution Tax (DDT) on the dividends they distributed to shareholders. The DDT was levied at a rate of 15% (plus surcharge and cess). The shareholders were not taxed on the dividend income received. However, with the new tax rules, the DDT has been abolished, and the tax burden has shifted to the shareholders.

Now, the tax on dividends is directly paid by the shareholder based on their income tax bracket.

2. Tax Rates on Dividends

The taxation of dividend income depends on the total amount of income you earn in a financial year. Here are the tax rates that apply:

• For individuals below the taxable limit: If your total income (including dividends) is below the basic exemption limit (₹2.5 lakh for individuals below 60 years), no tax will be levied on your dividend income.
• For individuals in the 0%-5% tax bracket: If your total income exceeds ₹2.5 lakh but is below ₹5 lakh, your dividend income will be taxed at the rate of 5%.
• For individuals in the 20% tax bracket: If your total income exceeds ₹5 lakh but is below ₹10 lakh, the dividend income will be taxed at 20%.
• For individuals in the 30% tax bracket: If your total income exceeds ₹10 lakh, the dividend income will be taxed at 30%.

Additionally, a **surcharge** and **cess** are applicable. For example, the health and education cess is levied at 4% on the total tax amount. This means that if your dividend income is taxed at 30%, you will pay an additional 4% cess on the calculated tax amount.

3. Dividend Taxation for NRIs (Non-Resident Indians)

For Non-Resident Indians (NRIs), dividend income is subject to tax at a rate of 20% (plus applicable surcharge and cess). NRIs can also claim the benefit of lower tax rates under the Double Taxation Avoidance Agreement (DTAA) if their home country has a tax treaty with India.

For example, an NRI receiving dividends from Indian companies would be liable to pay 20% tax on those earnings, but the DTAA might allow them to pay tax at a lower rate (for instance, 15%) depending on the country they reside in.

4. Taxation on Dividend from Mutual Funds

If you are earning dividends from mutual funds, the tax treatment is slightly different. Mutual funds also distribute dividends to investors, but unlike direct equity stocks, these dividends are taxed at a different rate:

• Equity Mutual Funds: Dividends from equity mutual funds are taxed as per the individual's income tax slab. There is no separate tax on dividends from equity mutual funds.
• Debt Mutual Funds: The tax on dividends from debt mutual funds is also taxed as per the income tax slab of the investor. Additionally, debt mutual funds may distribute dividends after paying a Dividend Distribution Tax (DDT) at the rate of 25% (plus surcharge and cess).

5. The Role of Tax Deducted at Source (TDS)

Companies distributing dividends are required to deduct tax at source (TDS) before making the payment to shareholders. The standard TDS rate on dividends is **10%** if the total dividend payout exceeds ₹5,000 in a financial year. This TDS is deducted and paid directly to the government on behalf of the shareholder.

If the total dividend income is below ₹5,000, no TDS is deducted. However, if you are in a lower income bracket (and not liable to pay taxes), you can submit a **Form 15G/15H** to avoid TDS deduction.

In cases where the TDS is deducted, it can be claimed as a tax credit while filing your income tax return. You can adjust the TDS amount against the total tax payable and receive a refund if applicable.

6. Conclusion

Dividend taxation in India is a straightforward process, but it’s important to understand how the changes in tax laws affect your earnings. Remember that the tax you pay on dividends depends on your income tax slab, the source of the dividend (equity vs. mutual fund), and whether you’re an NRI. Always keep track of TDS deductions and file your income tax returns properly to claim any refunds or adjustments.

If you’re an investor earning regular dividends, being mindful of tax implications can help you plan your investments and maximize your returns. For detailed tax planning, it’s always recommended to consult with a tax advisor.