Tax on Dividend Income (Update 2023)

If you have been investing in the stock market then you know that now you are liable to pay tax on dividend income. As per the new Finance Act, 2020 companies are no longer required to pay the DDT i.e. Dividend Distribution Tax on the dividends they earn from investments in the stock market.

Let’s get into the details step by step.

Table of Contents

What is a Dividend tax?

When a person buys shares or equity stocks of a company or invests in mutual funds and other investments that deal in trading, they own a part of that company i.e. shareholders/stakeholders. If the company gains any profits or dividends/gains, its distributed among the shareholders. This dividend or gain is counted as an extra source of income and is applicable to dividend tax.

Types of Dividends: A shareholder can receive dividends as

Final Dividend which is paid out after the end of the financial year (from 1st April to 31st March of next year).

Interim Dividend is paid within the financial year is over.

Are dividends tax-free income?

No, dividends are not tax-free income.

Are dividends capital gains?

No, dividends and capitals are different types of gains.

The dividend is the profit shared by the company to its shareholders whereas, the capital gain is the profit earned by the investor after selling their stock/shares.

How do I know if my dividends are qualified or ordinary?

Qualified dividends are those dividends that you receive by keeping the stocks for a period of 61 days or more during the duration of 121 days prior to the declaration of the ex-dividend date.

The qualified dividends are taxed as per the long-term capital gains interest rates.

Ordinary dividends are those dividends that you receive by keeping stock for less than 61 days. These dividends are taxed at the ordinary income tax rate.

Income from real estate investment trusts and master limited partnerships are examples of ordinary dividends.

Do I need to declare dividend income in ITR?

Yes, you must declare your dividend income in ITR. Usually, forms ITR 1 or ITR 2 are used to file the dividend income.

The dividend income is taxed depending on whether it’s qualified or ordinary. Other factors that influence the tax rate are as per the Finance Act, 2020.

ITR 1 is a simple form and can be filled out online on the income tax portal. However, ITR 2 is very complex and requires more attention to detail. That’s why it’s recommended to either take professional help or fill it out carefully.

The tax rates applicable to the dividend amount are discussed below.

What is the tax rate on dividends in 2022?

The dividend income will be charged to a normal tax rate as per the tax slab. A TDS of 10% is charged on a dividend income that is more than Rs 5,000 in that financial year.

However, if the shareholder receives dividends in form of GDRS issued by any Indian company under an Employees Stock Option Scheme, then dividends will be taxed at the rate of 10%. There will not be any further deduction under Income-tax Act.

One important point to remember is that the GDRS must be purchased by the employee in foreign currency.

How do you calculate tax on dividends?

The tax rate applicable to dividend income is mentioned below.

Domestic companies are liable to deduct TDS at the rate of 10% under section 194 of the Income Tax Act before paying dividends to the resident shareholders. If the total dividend amount distributed or paid during the fiscal year exceeds Rs 5,000.

Dividends on LICs, GICs, or any other insurance company are not taxed if owned by a residential shareholder. It’s taxed only if it is owned by a nonresident or a foreign company, under section 195 as per the relevant DTAA.

Dividends received during the financial year 2020-21 and onwards are taxed in hands of shareholders under section 115BBDA when the dividend income exceeds Rs 10 lakh.

For resident shareholders, the dividend income is charged as per section 8, in which the final dividend including deemed dividend is taxable in the year in which it is declared, distributed, or paid by the company, whichever is earlier. Whereas the interim dividend is chargeable to tax on a receipt basis.

For nonresident shareholders including FPIs, the dividend income is taxable under the head source.

How do I avoid paying taxes on dividends?

You can claim a deduction in ITR on the earned dividend income.

Deductions on dividend income can be claimed if the dividends are shown as business income. The assessee can claim deductions on the expenses incurred to earn that dividend income like collection charges, interest on the loan, etc.

However, if the dividend is taxable under the head source, the assessee can claim deductions only on the interest expenses incurred to earn the dividend income and cost about 20% of the total dividend income.

FAQ- Tax On Dividend Income

Are dividends taxed twice?

Yes, if the dividend is received from a foreign company, it is liable to be taxed twice. But, you can claim a tax refund under the DTAA as per the government of India or under section 91 in absence of such an agreement with the foreign country.

Do you pay tax on dividends if you reinvest them?

Yes, any type of dividend is counted as an income irrespective of its usage afterward. The companies giving the dividends are liable to cut the tax before paying out the dividends to their shareholders.

Is TDS deducted from dividend income?

Yes, TDS is deducted from dividend income at the rate of 10% if the dividend income exceeds Rs 5,000.

Conclusion

Tax on dividend income has been imposed on the shareholders/assessee after the amendment in the Finance Act 2020, which removed the DDT. Dividends are considered taxable income and must be declared in ITR as they are subjected to TDS. The tax on the dividends must be submitted within 90 days of receiving them with the PAN details. For 15G or 15H and ITR 1 or 2 can be used to declare the dividends. All the companies are liable to deduct the tax from the dividend before distributing them to their respective shareowners. With the end of this financial year on 31st March 2023, file your income tax returns before July of this year.