While investing in mutual funds (MFs), many people opt for the dividend payout option to get regular income while staying invested.
While investing in mutual funds (MFs), many people opt for the dividend payout option to get regular income while staying invested. Individuals who invest in direct stocks also enjoy dividend income, depending on the amount of profit the companies make.
Change in the tax treatment of dividend income
Until the 2019-2020 fiscal year, companies and fund companies paid the dividend distribution tax (DDT) before distributing the dividend, while the amounts of dividends received were exempt from tax in the hands of the investors.
Thus, regardless of their tax bracket, investors benefited from the same tax treatment.
However, things have changed now after DDT was abolished, making dividend income taxable in the hands of investors.
“The Finance Act 2020 amended the provisions relating to the taxation of dividend income under the Income Tax Act 1961 (“the Act”). Prior to the amendment, the dividend was taxed between the hands of the company paying the dividend.The company paying a dividend was required to pay the dividend distribution tax (DDT) u/s 115-O of the law.In addition, such dividend received was exempt in the hands of the shareholders pursuant to Section 10(34) of the Act,” said Dr. Suresh Surana, Founder of RSM India.
Thus, investors in higher tax brackets have to pay more tax on dividend income than investors in lower tax brackets.
“The 2020 finance law removed the notion of DDT and made dividends taxable in the hands of shareholders in accordance with the classic dividend tax regime. This amendment entered into force on April 1, 2020. Thus, in the event of dividends being distributed on or after April 1, 2020, the company paying the dividend is not liable for the dividend distribution tax (DDT) and the dividends are taxable in the hands of shareholders, at the slab rates applicable to them,” said Dr Surana.
Speaking of the rate of tax on dividend income, Dr Surna said: “In accordance with Section 56(2)(i) of the Act, dividends would generally be taxable under the heading ‘Income from other sources’. , unless the shares are held for a business purpose in which the same would be subject to tax as business income, they will be taxed at the normal rates of taxation applicable to the taxpayer. Section 57, the taxpayer may not claim the deduction of any expense from dividend income except interest expense on money borrowed for investment purposes. also subject to a maximum limit of 20% of the amount of gross dividends.
Dividend income becoming taxable, tax is now deducted at source (TDS) by companies and management companies.
“Section 194 of the Act contains TDS provisions relating to dividends paid to residents. According to this article, the company which pays dividends must deduct a tax of 10% at the time of the payment or distribution of the dividends. The TDS should not be deducted when the amount of the dividend does not exceed Rs 5,000 and it is paid to resident individuals by any means other than cash. In the event of dividends paid to non-residents, the provisions of TDS u/s 195 are applicable and for which the rate prescribed by law is 20%. However, it should be noted that non-resident shareholders may avail themselves of the withholding rates prescribed under the provisions of their country’s tax treaty with India, if this is more beneficial to them and under certain conditions. said Dr. Surana.
So if your income is not taxable or you are in the 5% tax bracket, you can claim a refund of the excess TDS amount. Otherwise, you will have to pay more taxes on top of the TDS rate, depending on your income level.
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