TDS on Dividend Income
- Dividends are taxable income and TDS is deducted before they are credited to investors.
- Since April 1, 2020, dividends are taxed as per the investor's income slab rate.
- TDS on dividends is 10% if the amount exceeds ₹5,000 annually, or 20% if PAN is not provided.
- Investors with income below the taxable limit can submit Form 15G or 15H to avoid TDS.
- You can claim deductions for interest expenses and refunds for excess TDS when filing taxes.
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.
