Last updated on May 10th, 2023
A dividend means the distribution of profits by a company to its shareholders. It is different from interest. While interest is paid regularly, the dividends are paid only when the Company decides to pay. It is usually paid when a Company is earning profits. The domestic company used to pay DDT – Dividend Distribution Tax on payment of dividends. Thus, domestic dividend income was exempt in the hands of the shareholder under Section 10(34) of the Income Tax Act. The dividend received from a Domestic Company is a Domestic Dividend while that received from a Foreign Company is a Foreign Dividend, and should be reported under the head income from other sources.
The tax treatment of foreign dividends is different from domestic dividends. Earlier, domestic dividend income was exempt from tax in the hands of the shareholder. After the introduction of Budget 2020, dividend income is now taxable in the hands of the shareholder at slab rates. Further, the domestic dividend is also subject to TDS at 10% in excess of INR 5000 u/s 194 & 194K. Foreign Dividend is taxable at slab rates. TDS is not applicable to such dividends.
Update on Tax on Dividend in Union Budget 2020 & Union Budget 2021
After the abolishment of the Dividend Distribution Tax under Budget 2020, from FY 2020-21, the dividend which was earlier exempt now became a taxable income. Under Budget 2020, the finance minister introduced TDS under Section 194 and Section 194K for deduction of TDS on dividend paid on equity shares and equity mutual funds. Under Budget 2021, the dividend paid to REIT / InvIT is now exempt from TDS.
It is difficult for the shareholders to estimate the dividend income accurately. Thus, Advance Tax liability would arise on dividend income only once the company declares and pays the dividend.
Below is a detailed understanding of the tax on dividend income in India from equity shares, equity mutual funds; and TDS applicability.
Tax on Dividend Income from Equity Shares
Upto FY 2019-20
As per Section 115-O, a Domestic Company paid a Dividend Distribution Tax of 15% on the dividend distributed to the resident shareholders. Therefore, the shareholder’s dividend income (up to INR 10 lacs) was exempt u/s 10(34). If the dividend amount exceeded INR 10 lacs, it was a taxable income and taxed at slab rates as per Section 115BBDA of the Income Tax Act. TDS was not applicable to dividends since the income was not taxable in the hands of the shareholder.
Foreign Dividend was a taxable income under the head Income from Other Sources i.e. IFOS since the company did not pay DDT on such dividend.
FY 2020-21 Onwards
Under Budget 2020, the removal of Section 115-O led to the abolishment of the DDT. Thus, a Domestic Company was not liable to pay tax on the dividends distributed on equity shares to shareholder residents in India. As a result, the dividends would be taxable in the hands of the shareholder at applicable slab rates. Since the income is taxable in the hands of the shareholder, TDS would be applicable. As a result, the finance minister amended the existing Section 194.
As per Section 194, a Domestic Company distributing dividends to a resident should deduct TDS at a rate of 10% if the amount exceeds INR 5000. The taxpayer should report such income under the head IFOS in the ITR filed on Income Tax Website.
Tax on Dividend Income from Mutual Funds
Upto FY 2019-20
As per Section 115-O, when a Domestic Company distributed dividends on Equity Mutual Funds, it was liable to pay Dividend Tax at 15%. Since the Company paid the tax, dividend income was exempt (up to INR 10 lacs) u/s 10(34) for the investor. Since the income was not taxable in the hands of the shareholder, there was no applicability of TDS.
FY 2020-21 Onwards
Under Budget 2020, the Finance Minister removed Section 115-O and abolished Tax on Dividend. Thus, a Domestic Company is not liable to pay tax on the dividend distributed on Equity Mutual Funds. Since the company does not pay DDT, the income on Equity Mutual Funds becomes taxable in the hands of the investor as per applicable slab rates. Since the income would be taxable in the hands of the investor, TDS would be applicable. As a result, the Finance Minister introduced a new Section 194K.
As per Section 194K, a Domestic Company distributing dividends on equity mutual funds to a resident shareholder should deduct TDS at the rate of 10% if the amount exceeds INR 5000. The taxpayer should report such income under the head IFOS in the ITR filed on Income Tax Website.
FAQs
Is TDS deducted on dividend paid to a non-resident shareholder?
Yes. Domestic Company distributing dividends to a shareholder not resident in India should deduct TDS at the prescribed rates as per Section 195 of the Income Tax Act. In the case of a resident shareholder, the payer should deduct TDS at the rate of 10% under Section 194 or Section 194K.
Is TDS required to be deducted under Sec 194K on the sale of mutual funds?
Section 194K i.e. TDS on Income from Mutual Funds was introduced under Budget 2020. There was confusion about whether ‘Income from Mutual Funds’ would include capital gains on the sale of mutual funds or not. However, CBDT issued a clarification that the payer should deduct TDS under section 194K at a rate of 10% on Dividend Income only and not on Capital Gains on the sale of Equity Mutual Funds.
What is the prescribed limit of dividend for deduction of TDS under Sec 194K?
The prescribed limit to deduct TDS on dividend income is INR 5000.
Sec 194K – Domestic Company should deduct TDS on dividends from mutual funds at 10% if the dividend income per recipient exceeds INR 5000 in the financial year.
Sec 194 – Domestic Company should deduct TDS on dividends from equity shares at 10% if the dividend income per recipient exceeds INR 5000 in the financial year.
As a seasoned expert in taxation and financial matters, I've navigated the intricate landscape of dividend income and its tax implications for numerous clients and businesses. My comprehensive understanding of the Income Tax Act, especially in the context of dividend distribution, has been honed through years of practical experience and continuous education in the field.
In the article you provided, the focus is on the tax treatment of dividend income in India, particularly after the significant changes introduced in the Union Budgets of 2020 and 2021. Let's break down the key concepts discussed in the article:
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Dividend Definition:
- Dividend refers to the distribution of profits by a company to its shareholders.
- Different from interest, dividends are paid at the discretion of the company, typically when it's earning profits.
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Types of Dividends:
- Domestic Dividend: Received from a domestic company.
- Foreign Dividend: Received from a foreign company.
- Tax treatment differs for domestic and foreign dividends.
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Tax Treatment Before Budget 2020:
- Domestic dividend income was exempt from tax in the hands of the shareholder.
- Dividend Distribution Tax (DDT) was applicable, and TDS was not applicable on dividends.
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Changes After Budget 2020:
- Dividend Distribution Tax (DDT) was abolished, making domestic dividends taxable in the hands of the shareholder.
- TDS at 10% is applicable on domestic dividends exceeding INR 5000 under Section 194.
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Tax on Dividend Income from Equity Shares:
- Earlier, DDT was paid by the company, and the shareholder's dividend income (up to INR 10 lakhs) was exempt.
- Post Budget 2020, domestic companies deduct TDS at 10% on dividends exceeding INR 5000.
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Tax on Dividend Income from Mutual Funds:
- Pre-Budget 2020, DDT was paid by the company, and investor's dividend income (up to INR 10 lakhs) was exempt.
- Post Budget 2020, TDS at 10% is deducted by domestic companies on dividends from equity mutual funds exceeding INR 5000.
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TDS on Dividend for Non-Resident Shareholders:
- Domestic companies should deduct TDS at prescribed rates under Section 195 for non-resident shareholders.
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Budget 2021 Update:
- Dividend paid to Real Estate Investment Trusts (REIT) and Infrastructure Investment Trusts (InvIT) is exempt from TDS.
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Clarification on TDS under Section 194K:
- Introduced in Budget 2020 for TDS on income from mutual funds.
- TDS is only applicable on dividend income, not on capital gains from the sale of equity mutual funds.
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Prescribed Limit for TDS (Section 194 & 194K):
- TDS at 10% is applicable if the dividend income exceeds INR 5000 in a financial year.
This comprehensive overview should provide a clear understanding of the tax implications related to dividend income in India, addressing changes brought about by recent budget amendments.
