Income tax on Dividend
Results of the listed companies are being declared and they are issuing dividends and bonus shares to their loyal shareholders who have invested in the company. Dividends are the profit of the company that the company distributes every quarter or annually, based on the decision of the board of directors and members. The dividend is taxable in the hands of shareholders. The income tax on dividends is paid by the shareholder at the slab rate in which he falls. Before 01-04-2020 dividend was exempt in the hand of shareholders since companies were liable to pay dividend distribution tax. From 01st April 2020, dividends are taxable in the hands of shareholders and the companies having registration in gurgaon are only liable to deduct TDS on dividends. It is important to note that dividend includes interim dividend and final dividend.
TDS rate on Dividend
a. For Resident:
The TDS on dividends is deductible under section 194 of the income tax act 1961. The current rate of TDS on dividend is 10%, which means that 90% of payment will be credited to the bank account of the shareholder after TDS deduction. However, TDS is not deducted when amount of dividend does not exceed Rs.5,000 by an individual in a financial year Income tax consultant in Gurgaon. It is important to note that exemption from non-deduction of TDS is given to the Individual only. For other shareholders rate of TDS will remain the same.
For Example: Mr. Modi is a resident of India and living in Gurgaon and he has received an interim dividend of Rs. 6,00,000/- and a final dividend of Rs. 8,00,000/- during the financial year. He takes advice of CA in Gurgaon about the changeability of tax on dividend
Mr. Modi approaches an income tax consultant in Gurgaon and CA in gurgaon advises that amount of dividend of Rs. 14,00,000/- (6 lakhs + 8 lakhs) is taxable in the hands of Mr Modi and he will be taxed on the basis of slab rate in which he falls.
b. For Non-Resident:
A non-resident invests in India either directly or through foreign portfolio investors (FPIs). A non-resident can also be a promoter or shareholder of any private company registered in gurgaon. In consideration, private company registration in gurgaon distributes profits to its shareholder in form of Dividends. The Dividend is generally taxable under the head Income from other sources. For FPIs, securities are held as capital assets hence dividend income shall be taxable under the head of other sources.
Where any dividend is paid to a non-resident or a foreign company, the tax shall be deducted under section 195 of the income tax in accordance with the relevant double taxation avoidance agreement (DTAA) signed with the foreign country.
The dividend income, in the hands of non-residents including FPIs is taxable at the rate of 20%. However, the dividend income of an investment division of an offshore banking unit shall be taxable at the rate of 10%.
The rates of income tax on dividends are summarised here:
|Section 115AC||Non-Resident||Dividend on GDRs of an Indian Company or Public Sector Company (PSU) purchased in foreign currency||10%|
|Section 115A||Non-resident or foreign company||Dividend income of any other case||20%|
|Section 115E||Non-resident Indian||Dividend income from shares of an Indian company purchased in foreign currency.||20%|
|Section 115AD||FPI||Dividend income from securities (other than units referred to in section 115AB)||20%|
|Investment division of an offshore banking unit||Dividend income from securities (other than units referred to in section 115AB)||10%|
Taxability of Dividend under Double taxation avoidance agreement (DTAA)
The dividend income is chargeable to tax in the source country and the country of residence of the assessee, consequently, the country of residence provides credit of tax paid in the source country. Thus, the provision of the income tax act and DTAAs work together to check the implication of tax on dividends. A further provision of the Multilateral Convention (MLI) which India is a signatory shall be implemented with the recommendation of the Organisation for Economic Co-operation and Development (OECD) to prevent Base Erosion and Profit Shifting (BEPS).
Dividend income is a profit of the company and the company that distributes it shall be liable to deduct TDS under section 194 of the income tax act. For a resident of India, if shares are held as capital assets then, the dividend received shall be taxable under the head of income from other source. For non-resident, shareholders, the changeability of tax is to be seen with the combined provisions of DTAA, Income tax act and MLI.
Read our previous blogs on
1. Procedure to remittance/transfer of money out of India
2. Tax rate and the relevant provisions applicable to the NRI selling property in India
3. GST provisions applicable to Non-residents in India
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