When a taxpayer invests for the first time, they might be unsure about the tax implications of dividend payments they receive from companies they have invested in. There is a different tax on dividends for investments in Indian companies and those in foreign companies.

  • Dividend from Indian companies

    As per Section 115BBDA of the Income Tax Act, there is no tax on dividend received from an Indian company if the total amount of earnings through dividend is more than ₹10 lakhs. This is applicable to resident individuals, Hindu Undivided Families, and firms as well.

    Otherwise, there are tax implications of dividend payments in the form of DDT (Dividend Distribution Tax) which the company deducts while declaring dividends. The rate of DDT is 15% of the total dividend distributed, declared, or paid by the company. After a surcharge of 12% and education cess of 4%, the effective rate of tax becomes 20.3576%.

  • Dividend from foreign companies

    Under the head of‘income from other sources’ the dividend from a foreign company is taxable. These dividends will be added to the total income of the taxpayer for assessment. The tax implications of dividend payments will be as per the tax slab applicable to the taxpayer.

  • Deductions under income from other sources

    Although dividend from a foreign company is taxable, the commission paid to a banker or any other entity for receiving the dividend on behalf of the taxpayer is deductible under Section 57 of the Act.

  • Double taxation

    Dividend from a foreign country is taxable twice- once in India and once in the country where the company is based. When the taxpayer pays tax on dividend twice in this manner, they can claim double taxation relief under two provisions.

    1. Under Section 90 and Section 90A, a taxpayer can claim tax paid in the foreign country under the terms of the tax treaty (DTAA) that India has with the specific country or specified associations. The taxpayer can choose which law would be applicable- the treaty or Indian tax laws, whichever is more beneficial.
    2. Under Section 91, a taxpayer can claim unilateral relief in India for taxes paid in the foreign country in the absence of the aforementioned treaty.
  • Exchange rate for foreign tax credit

    The exchange rate for conversion of tax paid in foreign country is the rate of buying of telegraphic transfer used by SBI on the final day of the month immediately before the month in which the tax is paid. This is the rate at which the amount of foreign tax credit is determined.