TDS on Dividend Income
Dividends are a common source of passive income for investors in shares and mutual funds. However, just like other types of income, dividends are also subject to taxation. To ensure tax compliance, companies and mutual funds deduct Tax Deducted at Source (TDS) on dividend payouts before crediting them to investors. In this blog, we’ll explain everything you need to know about TDS on dividends, exemptions, and ways to minimize tax impact.
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What Is Dividend Income?
Dividend income is the profit distributed by a company to its shareholders from its earnings. Similarly, in the case of mutual funds, dividends are distributed from the fund’s profits. This income can be in cash or additional units (reinvestment). Since dividends are a source of income, they are taxable under the Income Tax Act.
Taxation of Dividend Income in India
Earlier, dividends were tax-free in the hands of investors because companies paid Dividend Distribution Tax (DDT). However, after April 1, 2020, the system changed, and dividend income became taxable in the hands of investors.
- Dividend income is now added to your total income and taxed as per your applicable slab rate.
- TDS is deducted by companies and mutual funds if the dividend amount exceeds the prescribed threshold.
TDS on Dividend Income
TDS is deducted on dividends paid to investors to ensure upfront collection of tax.
- Rate of TDS: 10% if the dividend amount exceeds ₹5,000 in a financial year.
- If PAN is not provided, TDS is deducted at 20%.
- TDS applies to both company dividends and mutual fund dividends.
This means even if your income is below the taxable limit, the company or AMC will deduct TDS unless you submit the required declaration forms.
How to Avoid/Reduce TDS on Dividend Income
Investors whose total income is below the taxable threshold can avoid unnecessary TDS deductions by submitting self-declaration forms:
- Form 15G: For individuals below 60 years.
- Form 15H: For senior citizens.
Submitting these forms to the company or mutual fund ensures that no TDS is deducted if your income is not taxable.
Deductions and Reliefs for Dividend Income
- You can claim a deduction for interest expenses incurred to earn dividend income, up to a maximum of 20% of such income.
- If excess TDS has been deducted, you can claim a refund while filing your Income Tax Return (ITR).
- Non-resident investors may get relief under Double Taxation Avoidance Agreements (DTAA) depending on their country of residence.
Conclusion
TDS on dividends ensures timely tax collection and prevents tax evasion. While the standard TDS rate is 10%, it is crucial to submit Form 15G/15H if your income is below the taxable limit. For higher-income investors, dividend income is taxed as per slab rates, but you can still claim refunds if excess TDS is deducted. Being aware of these rules helps in better tax planning and maximizing post-tax returns from dividend income.
As a Chartered Accountant with over 12 years of experience, I am not only skilled in my profession but also passionate about writing. I specialize in producing insightful content on topics like GST, accounts payable, and income tax, confidently delivering valuable information that engages and informs my audience.
Frequently Asked Questions (FAQs)
- What is the current TDS rate on dividend income?The current TDS rate is 10% if total dividend income in a financial year exceeds ₹5,000. If PAN is not provided, the rate increases to 20%.
- Is TDS applicable to dividends received from foreign companies?No, TDS is not deducted on foreign dividends. However, such dividends are fully taxable in India, and you must declare them in your ITR. Foreign countries may also deduct tax at source, but you can claim relief under DTAA.
- How do I claim a refund if excess TDS is deducted on dividends?If the deducted TDS is more than your actual tax liability, you can claim a refund by filing your Income Tax Return (ITR). The excess will be credited back by the Income Tax Department.
- Are senior citizens required to pay TDS on dividend income?Yes, TDS rules are the same for senior citizens. However, they can submit Form 15H if their total income is below the basic exemption limit to avoid TDS.
- Which forms (15G/15H) should be submitted to avoid TDS on dividends?Form 15G: For individuals below 60 years with income below exemption limit.
Form 15H: For senior citizens with income below exemption limit. - Can NRI investors avoid TDS on dividend income?No, NRIs cannot submit Form 15G/15H. For them, TDS is deducted at 20% (plus surcharge and cess). However, NRIs can claim lower rates under DTAA by submitting necessary documents.
- What happens if PAN is not provided to the dividend-paying company?If PAN is not provided, TDS on dividend is deducted at 20%, regardless of the income amount.
