Know how to avoid taxes to retain most of your dividend income

It’s the season for most Indian companies to pay out the final dividend for the financial year ending March.

However, with income comes the inevitable aspect of taxation.

This article offers an understanding of the nuances of TDS on dividend income, ensuring you’re well-equipped to navigate these waters.

A dividend is, at its core, a payment made by a company to its shareholders that is usually derived from its profits.

If you are an investor in stocks, Unit Linked Insurance Plans, or mutual funds, dividends might be a familiar term.

Dividends are a portion of a company’s profits that are distributed to its shareholders.

Instead of solely reinvesting all their earnings, companies can opt to distribute a part as dividends.

While these are typically cash pay-outs, they can also be additional stock shares or other valuable assets.

But the Income-tax Act, under Section 2(22), broadens the definition of dividends.

It’s not just the typical profit distribution; it includes distributions of accumulated profits, debentures, deposit certificates, and even certain loans or advances made by closely held companies.

The origin of your dividend can significantly influence its tax implications:

Domestic Companies: If you’ve invested in Indian companies, it is your source.

Foreign Companies: For those with a global investment portfolio, dividends might come from overseas entities.

Equity or Debt Mutual Funds: Depending on your chosen option, mutual funds can also distribute dividends.

Each of these sources has its own set of tax implications, making it critical to understand them all.

Today, every rupee received as a dividend is taxable at the investor’s applicable income tax slab rate.

Until the Assessment Year 2020–21, dividends from domestic companies were exempt from tax under section 10(34) of the Income Tax Act, as long as they didn’t cross Rs. 10,00,000.

Instead, the company bore the tax burden, paying a Dividend Distribution Tax (DDT).

The nature of taxability of dividend hinges on the investor’s profile — whether you are a trader or an investor.

The tax rate on dividends isn’t one-size-fits-all; it varies:

Resident Individuals: For those residing in India, dividends from domestic companies get taxed at their income tax rate.

NRIs: The landscape is a tad more complex for Non-Resident Indians. Dividends on shares of Indian companies attract a 20% tax, and the relevant sections of the Double Taxation Treaty Agreement could be availed.

Resident Shareholders: 10% tax will be deducted at source on the amount of dividend payable unless exempted under any of the provisions of the Income Tax Act.

TDS will not be applicable for individuals if the aggregate of total dividend paid to them by the Company during the financial year does not exceed Rs.5,000.

Dividend from foreign companies: Receiving dividends from a foreign entity can sometimes mean you’re taxed twice: once in the source country and then in India.

However, India’s network of DTAAs with various countries offers relief. These agreements often provide reduced tax rates, ensuring you aren’t penalized for global investments.

In the absence of a DTAA, Section 91 of the Income Tax Act can come to the rescue, offering relief from double taxation.

Plan Your Investments: If your dividend income is likely to exceed the taxable limit, plan your investments strategically to keep your overall income below the threshold.

Explore tax-saving instruments like Equity-Linked Savings Schemes (ELSS), Public Provident Fund (PPF), or National Pension Scheme (NPS) to reduce your taxable income.

Form 15G/15H: If you are eligible for a lower tax deduction or no tax deduction at all, submit Form 15G (for individuals) or Form 15H (for senior citizens) to the company or mutual fund.

These forms declare that your total annual income is below the taxable limit or that your tax liability is nil.

Utilize Double Taxation Relief: If you receive dividends from a foreign company and face potential double taxation, use the provisions in the relevant DTAA agreement or Section 91 of the Income Tax Act to claim relief.

Keep Track of Expenses: If your dividend income is taxable under the head of business income, keep thorough records of all expenses incurred to earn that income.

These expenses, such as collection charges and interest on loans, can be claimed as deductions, reducing your taxable income.

File Income Tax Return and Claim Refunds: Even if TDS has been deducted from your dividend income, file your income tax return to claim any refund if you are not liable to pay tax. Properly report your dividend income in the tax return and provide accurate details to ensure a smooth refund process.

Dividends, while a lucrative source of income, come with their share of tax complexities. By understanding the sources of your dividends, the associated tax implications, and the relief mechanisms in place, you can ensure that you’re not just earning wisely but also retaining more of your hard-earned money.

This article is to make you aware of the tax laws and not an expert. There could be some variations. Seek expert advice from a tax consultant to know what applies to you.

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