Dividends serve as a source of income for investors across India. Here is what taxpayers need to know about taxation on dividends when filing their tax returns:
Dividends From Indian Companies
Income from dividends received from Indian companies is exempted. This is because the company deducts dividend distribution tax (DDT) of 15% (+ applicable surcharge and cess) before paying you the dividends. However, if your total dividend amount exceeds ₹10 lakhs, you will be charged a tax rate of 10% on the excess amount.
Let’s understand with an example. You are earning total dividends of ₹20 lakhs from different Indian companies in a year. Your dividend income crosses ₹10 lakhs so you pay a tax of 10% on the excess income. In this case, it is ₹10 lakhs so the tax will be ₹1 lakh.
Dividends From Foreign Companies
There are no exemptions for taxation on dividends from foreign companies. Such dividends fall under the category of “income from other sources.” The dividends are included in your total taxable income with applicable tax rates based on your income slab. If you come in the 20% tax slab, then your foreign dividends will be taxed at 20% with cess. Foreign companies are exempted from paying DDT on dividends to shareholders too.
However, you could enjoy some tax relief from double taxation. Dividends from a foreign company may get taxed twice - in India and from the country where the company functions. Double taxation is when tax is deducted from that dividend in the foreign country, too. In this case, you can claim relief through double taxation from as per the Double Taxation Avoidance Agreement. If the agreement does not exist for that country, you claim tax relief under Section 91.
Dividends from Mutual Funds
Section 10(35) of the Income Tax Act states that any individual earning dividends from debt and equity mutual funds are fully tax-exempted. However, the fund house must pay a DDT of 25%, which goes up to 29.12% (including surcharge and cess) on debt mutual funds. Taxation on dividends from equity funds is charged at 10%. As seen with dividends from domestic companies, DDT is deducted from these dividends before the payments made to debt mutual fund investors.