All you need to Know About Dividend Tax Rate in India

Last Updated : March 13, 2023, 5:36 p.m.

Making an investment in the stock market can be an exciting way to grow your wealth, and one of the critical benefits of stock ownership is the potential to receive dividends.

A dividend is a payment type made by a firm to its shareholders, usually in the form of cash or an additional share of stock. It is a way for a company to distribute some of its profits to its investors as compensation for their investment in the company. Paying dividends has been a longstanding practice in business and is an essential consideration for many investors.

The purpose of paying dividends is to reward shareholders for their company investment and provide a return on their investment. Companies may choose to pay dividends as a way to attract and retain investors, especially those who value a steady income stream. Paying dividends also signals to the market that a company is financially healthy and profitable.

Dividend Taxation in India

The taxation of dividends in India has changed in recent years. Prior to Assessment Year 2020-21, dividends received by shareholders from domestic companies were exempt from tax under Section 10(34) of the Income Tax Act. However, the domestic companies were liable to pay Dividend Distribution Tax under Section 115-0. The Finance Act of 2020 abolished DDT and shifted to the classical system of taxation, where dividends are taxed in the investors’ hands.

As a result of this change, if a dividend is distributed after April 1, 2020, domestic companies are not responsible for paying Dividend Distribution Tax, and the shareholders are responsible for paying tax on such dividend income. This means that dividends received by shareholders from domestic companies are now considered taxable income and taxed accordingly.

With the revival of various provisions of the Income Tax Act, shareholders are now allowed to claim expenses related to the dividend income and can claim a tax deduction from the dividend income, and the treatment of inter-corporate dividends has also changed.

Understanding Dividend Functioning

A dividend’s value is calculated on a per-share basis and is distributed equally among shareholders of the same class, such as common or preferred shares. The payment of a dividend must first be approved by the Board of Directors. The process begins with the generation of profits and retained earnings by the company. The management team then decides to pay out a portion of the benefits to shareholders, and the board approves the planned dividend. The company announces the details of the dividend, including the value per share, the payable data, and the record date. Finally, on the expected date, the dividend is paid to shareholders.

The Taxation of Dividends for Residents and Non-Residents in India

The taxation of dividends received by residents and non-residents in India is governed by the Indian Income Tax Act.

For residents

• A Dividend received by individuals is considered taxable income and is taxed under the heading “income from other sources.”
• As per the Income Tax Act, starting from the Financial Year 2020-21 (the assessment year 2021-2022), dividends received from domestic companies are taxed at a rate of 10% for residents.
• The amount of dividend received above Rs. 5,000 in the financial year is taxable.

For non-residents

• Dividend received by non-residents from Indian companies is taxed as per the provisions of the Income Tax Act.
• The rate of tax for non-residents is a flat rate of 30% plus surcharge and education cess unless a lower rate is specified under a Double Taxation Avoidance Agreement (DTAA) between India and the non-resident’s country of residence.
• In such cases, the lower tax rate specified in the (DTAA) will apply to the dividend received by the non-resident.

Types of Dividend Payouts

Dividends are a reward for investing in a company, and they come in various forms. Whether you are an experienced investor or just starting out, understanding the different types of dividend payouts is essential to maximizing your returns. From cash dividends to stock dividends and even property dividends. There are three types of dividend payouts in the real world people know:

1. Cash Dividend: This is the most common form of dividend payout where the company pays the dividends to shareholders in cash. This can be in the form of a cheque or a direct deposit into the shareholder’s bank account.
2. Stock Dividends: In this form of dividend payout, the company issues additional shares to shareholders instead of cash. This increases the number of shares held by the shareholder and therefore increases their ownership stake in the company.

Property Dividends: In rare cases, a company may pay a dividend in the form of property or other assets. This is more common in real estate investment trusts (REITs), where the dividends are delivered in the form of units in the underlying real estate properties.

It is important to note that the type of dividend payout can impact the tax treatment of the dividends for shareholders. In most cases, cash dividends are taxed as ordinary income, while stock dividends may be taxed as capital gains or as dividends, depending on the specific tax laws in the jurisdiction where the shareholder resides. Property dividends may also be taxed differently, depending on the particular tax laws in the jurisdiction where the shareholder resides.

Double Taxation Relief on Dividend Income

Dividends received from a foreign company are subjected to taxation both in India and in the foreign company’s home country. This can result in double taxation of the same income. To avoid this, India has provisions for double taxation relief. The relief can be claimed either through the provisions of the double taxation avoidance agreement entered into by the Indian government with the foreign company’s home country or through Section 91 in case no such agreement exists. This ensures that the taxpayer is not required to pay tax on the same income twice.

The advantage of Dividend Distribution Tax

The benefits of Dividend Distribution Tax in India are as follows:

1. Avoidance of double taxation: It is collected as a source, i.e., by the company, which helps to avoid double taxation of the same income received by the shareholders.
2. Simplification of tax process: As the tax on dividends is collected at the source, the tax process for both companies and individual taxpayers is simplified.
3. Revenue generation: Dividend Destination Tax helps to generate revenue for the government, as the income received by shareholders in the form of dividends is taxed.
4. Encouragement of equity financing: DDT encourages companies to raise funds through equity financing rather than debt financing, as dividends paid to shareholders are taxed, while the interest paid on debt is tax-deductible for the company.

Improved compliance: Dividend Distribution Tax helps to improve compliance and increase the government’s tax base by including income from dividends in the tax net.

Dividend Distribution Tax helps to simplify the tax process, avoid double taxation, generate revenue for the government, encourage equity financing, and improve compliance.

Conclusion

Dividends play an essential role in the financial world and are a vital consideration for many investors. By providing a return on investment, they reward shareholders for their faith in the company and signal the company’s financial health to the market. The decision to pay dividends is a complex one and is influenced by many factors, including the company’s financial performance and future growth prospects.

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