Taxation on Dividend Income

Yes, there are a few exemptions and ways to avoid or reduce TDS on dividend income in India:

1. Threshold Exemption (₹10,000 Limit for Residents)

• No TDS is deducted if the total dividend paid by a company or mutual fund to a resident individual or HUF is ₹10,000 or less in a financial year.
• This applies only to dividends from a single company or mutual fund—if dividends from multiple companies exceed ₹10,000 in total, TDS will be deducted on amounts exceeding the limit.

2. Lower/NIL TDS for Residents (Form 15G/15H Submission)

• Form 15G (for individuals below 60 years) and Form 15H (for senior citizens) can be submitted if:
  • Total taxable income is below the basic exemption limit.
  • Tax liability for the year is zero.
• If valid forms are submitted, the payer will not deduct TDS on dividend payments.

3. DTAA Benefit for Non-Residents

• Non-resident investors (NRIs, FPIs, etc.) can claim a lower TDS rate under a Double Taxation Avoidance Agreement (DTAA) between India and their country of residence.
• Typically, DTAA rates range from 5% to 15%, depending on the country.
• To avail of this benefit, the recipient must provide Tax Residency Certificate (TRC), Form 10F, and a self-declaration to the company/mutual fund.

If TDS is deducted on dividend income, here’s what happens and how you can manage it:

1. TDS Reflects in Form 26AS & AIS

• The deducted TDS will be reflected in your Form 26AS and Annual Information Statement (AIS) on the Income Tax portal.
• You can verify whether the company/mutual fund has deposited the TDS with the government.

2. Adjust Against Tax Liability

• If you have a total tax liability (based on your income tax slab), the TDS deducted on dividends will be adjusted against your final tax payable at the time of filing your Income Tax Return (ITR).

3. Claim Refund if Excess TDS is Deducted

• If your total tax liability is lower than the TDS deducted, you can claim a refund while filing your ITR.

4. File Form 15G/15H to Avoid TDS Deduction

• If you are eligible, you can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to the company/mutual fund to avoid future TDS deductions.

5. DTAA for Non-Residents (NRIs/FPIs)

• If you are an NRI or foreign investor, and higher TDS (20% + surcharge + cess) is deducted, you can:
  • Claim a refund while filing ITR in India.
  • Apply for a lower TDS rate under DTAA by submitting Form 10F, TRC, and a self-declaration before the dividend payment.

Yes, certain expenses can be deducted from dividend income, but with limitations. Here’s how it works:

1. Deduction for Interest Expense (Section 57)

• Interest on loans taken to invest in shares or mutual funds (to earn dividends) is deductible.
• The maximum deduction allowed is 20% of the dividend income received in a financial year.
• Example:
  • If you earn ₹1,00,000 in dividends and have paid ₹30,000 as interest on a loan taken to buy shares, you can claim only ₹20,000 (20% of ₹1,00,000) as a deduction.

2. Expenses Not Allowed as Deduction

• Any other expenses, such as brokerage, advisory fees, management fees, or demat account charges, are NOT deductible from dividend income.

3. Dividend Tax Treatment

• For Individuals & HUFs: Dividend income is taxed at the applicable slab rate after claiming the above deduction.
• For Companies & Firms: Expenses related to earning dividends (such as interest, management fees) may be deducted as a business expense, provided dividends are part of business income.

Yes, foreign dividends are taxable in India, but their treatment differs from domestic dividends. Here's how it works:

1. Taxability of Foreign Dividends

• Resident taxpayers:
  • Foreign dividends received from overseas companies are fully taxable in India under the head "Income from Other Sources."
  • Taxed at your applicable slab rate (unlike domestic dividends, which have a TDS component).
• Non-Resident Indians (NRIs):
  • Foreign dividends are not taxable in India unless they are received in an Indian bank account.
  • They may be taxed in the country where the income originates.

2. No TDS in India on Foreign Dividends

• Unlike Indian company dividends (where 10% TDS applies), no TDS is deducted in India on foreign dividends.
• However, foreign countries may deduct withholding tax before remitting the dividend.

3. Foreign Tax Credit (FTC) Under DTAA

• If tax is already deducted in the foreign country, you can claim a Foreign Tax Credit (FTC) under the Double Taxation Avoidance Agreement (DTAA) while filing your Income Tax Return (ITR).
• To claim FTC, you must:
  • Report foreign income and tax paid in Schedule FSI of your ITR.
  • Submit Form 67 before filing the ITR.
  • Provide proof of tax payment (e.g., withholding tax certificate).

4. Exchange Rate for Conversion

• Foreign dividends must be converted to INR using the SBI telegraphic transfer (TT) buying rate on the last day of the month preceding the dividend receipt date.

If you receive dividends from foreign companies, you may face double taxation—once in the foreign country and again in India. However, relief is available under the Double Taxation Avoidance Agreement (DTAA) or Section 91 of the Income Tax Act.

1. Check DTAA Between India and the Foreign Country

If India has a DTAA with the country where the dividend is earned, you can claim Foreign Tax Credit (FTC). DTAA tax rates for dividends vary (usually 5% to 15%). If no DTAA exists, Section 91 provides relief based on tax paid abroad.

2. Determine Your Tax Liability in India

Foreign dividends are fully taxable in India as "Income from Other Sources" at your applicable slab rate. You need to convert foreign currency dividends to INR using the SBI TT buying rate on the last day of the month preceding the dividend receipt date.

3. Claim Foreign Tax Credit (FTC) in Your ITR

To claim FTC, follow these steps:

✅ File Form 67 before submitting your ITR.
✅ Report foreign income & tax paid under the "Schedule FSI" in the Income Tax Return.
✅ Declare foreign tax paid in "Schedule TR" (Tax Relief).
✅ Provide proof such as a tax withholding certificate from the foreign country.

4. Submit ITR & Get Refund (if eligible)

If foreign tax exceeds Indian tax liability, you won’t get a refund but can claim relief up to the tax payable in India.

Yes, advance tax is applicable on dividend income in India. Here’s how it works:

1. Advance Tax Applicability

• If your total tax liability exceeds ₹10,000 in a financial year, you are required to pay advance tax in four installments.
• Since dividend income is taxable under "Income from Other Sources" at slab rates, it must be included while calculating advance tax liability.

2. Due Dates for Advance Tax Payments

3. Exception for Dividend Income (Earlier Rule Removed)

• Earlier, dividend income was taxed only when received, so advance tax could be deferred until actual receipt.
• From FY 2021-22 onwards, this relaxation has been removed.
• Now, if you expect to receive dividends, you must estimate and pay advance tax accordingly.

4. Interest for Late Payment (Section 234B & 234C)

• If you fail to pay advance tax on time, interest is levied as follows:
  • Section 234B: 1% per month if total advance tax paid is less than 90% of the total tax liability.
  • Section 234C: 1% per month for shortfalls in individual installments.

5. How to Avoid Advance Tax Penalty on Dividends?

• Monitor dividend receipts and estimate tax liability regularly.
• Pay advance tax based on expected dividend income.
• If you receive unexpected high dividends after an installment date, pay tax in the next installment to reduce interest.

If a PAN is not submitted for dividend income, the following consequences apply:

1. Higher TDS Rate (Section 206AA)

• Normally, TDS on dividends for resident individuals is 10% under Section 194 of the Income Tax Act.
• However, if PAN is not provided, TDS is deducted at a higher rate of 20%.

2. No DTAA Benefit for Non-Residents

• For NRIs and foreign investors, the standard TDS rate on dividends is 20% + surcharge + cess.
• If PAN is not submitted, they cannot claim a lower tax rate under DTAA (Double Taxation Avoidance Agreement).
• The payer will deduct TDS at 20% or the highest applicable rate.

3. Difficulty in Claiming TDS Credit & Refund

• TDS will not reflect in Form 26AS if PAN is missing.
• The recipient may face issues while claiming TDS credit in their Income Tax Return (ITR).
• If excess TDS is deducted, a refund cannot be claimed easily without PAN linking.

4. Compliance Notices from IT Department

• Transactions without PAN may trigger compliance verification from the Income Tax Department.
• If dividends exceed ₹2.5 lakh per year, they may be reported under the Statement of Financial Transactions (SFT).

How to Avoid These Issues?

• Ensure PAN is updated with companies, registrars, and mutual funds.
• For NRIs, submit PAN, Form 10F, TRC (Tax Residency Certificate), and self-declaration to claim DTAA benefits.