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What is the percentage of tax on dividends in India?

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What is the percentage of tax on dividends in India?

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While most people focus on the capital gains one can make in the stock market, an often-overlooked aspect of equity stocks is the dividends they offer. Of the people that do keep this aspect in mind, most forget to ask a simple question - Are dividends taxable in India?

Long answer short - Yes, they are.

Here's everything you need to know about it.

What are dividends?

When you buy equity stocks of a company, you are a shareholder in that company. In other words, you own a part of the company. So, if the company decides to distribute its profits or reserves to its shareholders, you will  receive these in the form of dividends, proportional to the number of shares you own. 

There are two main types of dividends that you can receive as a company’s shareholder.

  • Final dividend

Final dividend is the dividend that is paid out after the end of a financial year. A financial year stretches from April 1 of one year to March 31 of the succeeding year. 

  • Interim dividend

Interim dividend is declared and paid during a financial year. It is done before the company's accounts for that financial year are finalised.

Taxability of dividends before April 1, 2020

Prior to April 1, 2020, dividends were tax-free for individuals who received it. 

Instead, the burden of taxation lay with the companies paying the dividends. These companies had to pay Dividend Distribution Tax (DDT) at the rate of 15% on the gross amount of dividend declared.

To what extent were dividends exempt from tax in India? As per section 115BBDA, only dividends in excess of ₹10 lakhs were taxable at 10% in the shareholder’s hands.

After the Finance Act, 2020 came into the picture, it switched things up for companies and shareholders who receive dividend income. 

Is dividend income taxable in India now?

Yes, dividend income is now taxable in India. Any dividend that you receive, either from your direct equity investments or from your equity mutual funds, will be liable to tax. 

Companies no longer have to pay Dividend Distribution Tax (DDT) since the onus of taxation has been shifted from the dividend payer to the dividend receiver. 

Dividend tax rates in India

The rate of tax on dividend income depends on the shareholder receiving the income. It is different for residents and non-resident Indians. And even among resident Indians, the tax rate on dividends may vary based on the nature of the earnings. 

Let’s get into the finer details for more clarity. 

Dividend tax rates in India for resident Indians

Here, the manner in which dividend is taxed depends on the recipient’s occupation. More specifically, it depends on whether the shareholder is engaged in the business of trading stocks. 

  • If the shareholder’s occupation involves trading stocks, any dividends received are taxed as business income. 
  • If the shareholder is simply an investor who earns dividends from Indian or foreign companies on account of investing in them, the dividend received is taxed as income from other sources. The rate of tax will be the income tax slab rate applicable to the shareholder. 

Let us take a small example to understand this. Say you work as a software engineer. And you earn an additional income of ₹10,000 as dividends by investing in some Indian and some foreign companies. And let’s assume you fall under the 30% tax bracket. 

In this case, your dividend income will also be added to your total income and taxed at 30%. 

Dividend tax rates in India for non-resident Indians (NRIs)

If you are a non-resident who has invested in shares of Indian companies, you will have to pay taxes on this income at the flat rate of 20%. 

So, let’s take the same example we discussed above, but let’s now say you are an NRI. In that case, the tax on your dividend income of ₹10,000 would come up to ₹2,000 (i.e. 20% of ₹10,000).

That said, taxation of dividends for NRIs will be subject to the provisions of India’s Double Taxation Avoidance Agreement (DTAA) with the country in which the concerned individual resides. DTAAs exist so the same income is not taxed twice. This means if you are an NRI and pay taxes on your dividends in India, you don’t have to pay tax on the same income abroad (or vice versa). In the rare event that your dividend income has been taxed twice, you can claim double taxation relief.

TDS on dividend income in India

The company or the mutual fund house that pays your dividends is responsible for deducting TDS on the dividend amount before it is paid out. The TDS rates on dividends also differ based on your residential status. 

If you are a resident individual

For any dividend income exceeding ₹5,000, TDS will be deducted at the rate of 10%. 

So, if you earn dividends of ₹10,000, you will only receive an income of ₹9,000 after ₹1,000 is deducted as TDS.

If you are a non-resident individual 

For any dividend income paid out, TDS will be deducted at the rate of 20%. This is also subject to the provisions of the relevant DTAA.

Summing it up

So, now you know that dividends are not tax-free, while there are some overall Tax Free Investment Options in India. And that they will be taxed at the same rate as the income tax slab applicable to you. That said, if you choose your stocks or mutual funds well, you can set up a stream of extra income on the side with just equity dividends alone. 

And come to think of it, you can use that income to invest in a tax-saving investment option periodically. That way, you can maximise your earnings, your savings and your tax benefits in one go!

Frequently Asked Questions

1. Is all dividend income taxable?

Yes, all dividend income is taxable in India. You will have to pay tax on your dividend income at the income tax slab rates applicable to you.

2. What amount of dividends are tax free in India?

Up until March 31, 2020, dividends up to ₹10 lakhs were tax-free for shareholders. However, with effect from April 1, 2020, no dividends are tax-free in India as per the new amendments put forth in the Finance Act, 2020.

3. Is dividend taxable in 2022?

Yes, any dividend income you earn is taxable in India. This includes dividends you earn from your direct equity investments as well as your mutual fund investments.

4.What is the exemption limit for dividend income?

In India, dividends received by an individual or a Hindu Undivided Family (HUF) are exempt from income tax up to a certain limit. The exemption limit for dividend income in India for the financial year 2021-2022 is Rs. 5,000. This means that any dividends received up to this amount are not taxable. Any dividends received above this limit are subject to income tax at the applicable rate.

Still Curious? Check out these reads

1. Your guide to taxes on dividends

2. What mutual funds should I buy to get assured returns or dividends

3. Dividend Policy - Meaning, Types, Factors, Objectives, and more

4. How is dividend payment done in India - complete explanation

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