Income Tax, TDS and Advance Tax on Dividend Income
Tax on dividend income: Earlier we were not liable to pay the tax on dividend income, as that was paid by the companies declaring dividend. But as per the prevalent scenario Dividend Distribution Tax (DDT) is removed by the government which has made these incomes liable in the hands of investors.
TDS on Dividend Income
Now in form 26 AS, we can get the details of the dividend income from there itself. Sometimes, it gets difficult to remember how much dividend we earned that too from which each source, inspite of its presence in passbook because of work pressure.
So to ease the process now it will be present in the Form 26AS. Moreover, TDS is applicable on Dividend income as per the provisions of Income Tax Act u/s 194. It states that-
If dividend income is more than Rs 5,000 then the applicable rate would be 10%. But in case, the investor has not updated his pan card then the rate for the same would be 20% for the Assessment year (2022-2023).
Note- Above payment of TDS needs to be claimed back by the asseeses in case the income individual is not more than 2.5 lakhs including Dividend income. As TDS on dividend income for tax return filers less than Rs2.5 lakh is exempted and will be refunded.
Advance Tax on Dividend Income
As we know earlier, it was quite difficult for us as the taxpayer to estimate the dividend income, as its with the discretion of company whether they will declare the dividend or not. In case we assume they will result in unnecessary interest liability under Section 234C relating to the penalty for delay in advance tax payment. But government brought a relief-
By introducing a provision in Section 234C of the advance tax payment that interest won’t be calculated if it is difficult to accurately calculate the advance tax due on dividend income as it’s an intrinsic nature of income.
As per this new provision, the liability for advance tax would arise only if the dividend is declared or paid within the due date of the Advance Tax Payment.
This will reduce the complexities of both the professionals and the tax payers when it comes to the calculation of Advance tax Payment relating Dividend Income.
Income tax on Dividend Income
Now, after knowing the impact of TDS and Advance Tax of Dividend, now we should dive into Income Tax applicable on same. In case of doubt, income tax is applicable on Dividend Income as well.
From 01.04.2021, Section 10(34) stating Exemption of dividend Income from taxation has been revoked by the Government. And Section 115BBDA that stated that taxability of dividend over Rs 10 lakhs is discarded as well.
Taxability of Dividend in hands of shareholders
1. Dividend can be taxable under head PGBP-
Income through shares, which are held for trading purposes then it will be considered as business income.
2. Dividend can be taxable under head Income from Other Source-
Income through shares, which are held as an investment then it will be taxable as Income from other sources.
Deduction from Dividend Income:
It is totally dependent on the nature of the income of the tax payer. Let us analyze in detail.
Deductions of all expenditures incurred to earn that dividend income which were held for the purpose of trading, for example interest on loan, collection charges, brokerage can be taken as deduction under business income in case of business income.
But the deduction is capped till 20% of total dividend income. And moreover, deduction related to interest expenditure will be allowed only.
No deduction will be allowed for any other expenditure.
Tax Rebate on Dividend Income
Now the main concern Income Tax Rate applicable on Dividend-
For Resident Individual, who is an employee of an Indian company or it’s subsidiary relating to IT, Entertainment ,pharmaceutical or bio-technology industry and is receiving dividend in respect of Global Depository Receipts(GDRs) issued by such company under Employees Stock option Scheme .
Then dividend on such income shall be taxable at rate of 10 % without any deduction under income tax act.
Compliances of Indian Companies-
An Indian Companies are required to deduct tax at source u/s 194 & 195 for residents and non –resident shareholders respectively. These companies can be either listed company or unlisted company. The TDS threshold limit does not apply in case the shareholder are –
Just for clarification-
Section 195- If recipient shareholder is a non-resident, then tax shall be deducted under Section 195. Dividend payment is subject to their tax at the rate of 20% increased by surcharge and health and education cess of 4%. Lower rate for tax may apply if benefit of the DTAA is available to shareholders.
The author of the above article is Sneha Bhalotia.
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