Tax on Dividend Income in India

Tax on Dividend Income in India

The term “Dividend” is very well known to us. It is a payment made by the companies to its shareholder out of its profit or reserve. But what is the tax on dividend income? Is the dividend income taxable in the hands of taxpayers? What is the rate of tax on the dividend?

All the answers of above questions are given below.

1. Dividend received from domestic company

According to the provisions of section 10(34), any dividend received from a domestic company is exempt from tax.

This is because the company has already deducted the dividend distribution tax before paying any dividend to you.

However, there is a certain exemption.

From the assessment year 2017-18, the dividend shall be taxable @10% if the aggregate amount of dividend received from a domestic company during the year exceeds Rs. 10 lakh (under section 115BBDA).

The assessee must be a resident individual/HUF/firm (but not being a domestic company, or a fund/ institution/ trust/ university/ educational institution /hospital/other medical institution referred to in section 10(23C)(iv)(v)(vi)(via), or a trust/institution registered u/s 12A/12AA).

Please remember, you have to pay tax @10% along with health and education cess on the amount in excess of Rs. 10 lakh.

For example

Mr. Avishek receives Rs. 1200000 as dividend from the different domestic company during the year.

His dividend income exceeds Rs. 1000000.

Hence, 10% of tax is chargeable on his dividend income in excess of Rs. 100000.

Therefore, the amount of tax payable is Rs. 200000 (Rs.12 Lakh minus Rs. 10 Lakh) x 10% = Rs. 20000.

Health and education cess is 4% of the tax payable.

Hence, the total tax payable is Rs. 20000 plus 4% of Rs. 20000 i.e. Rs. 28000

2. Dividend received from foreign company

Any dividend received from a foreign company is fully chargeable to tax in the hands of taxpayers.

It is taxable under the head “Income from Other Sources”.

There is no specific tax rate for dividend from a foreign company. It is chargeable as per tax slab on the basis of total income of the assessee.

3. Deemed Dividend

Deemed dividend is applicable to a company in which the public are not substantially interested i.e. closely held company.

According to section 2(22)(e) of the Income Tax Act 1961, deemed dividend is loans or advances paid by the company to

  • A shareholder who holds a minimum of 10% of the voting power of the company; or
  • Any concern in which such shareholder is a member or a partner and in which he has a substantial interest; or
  • Any payment on behalf or for the individual benefit of any such shareholders, to the extent to which the company, in either case, possesses accumulated profit.

Tax on Deemed Dividend

Up to 31st March 2018, deemed dividend was taxable in the hands of the recipient as there was no dividend distribution tax on such dividend.

However, from 1st April 2018, the deemed dividend is not taxable in the hands of the recipient as because dividend distribution tax @ 30% is applicable.

4. Dividend on Mutual Fund

There are two types of mutual fund- equity mutual fund and debt mutual fund.

As per provision of section 10(35) of the Income Tax Act 1961, any dividend on mutual fund (equity or debt, as the case may be) is fully exempt from tax.

5. Dividend Distribution Tax (DDT).

According to the provisions of section 115-O of the Income Tax Act 1961, any domestic company which is declaring the dividend, is liable to pay dividend distribution tax as per rate prescribed.

Rate of DDT

Particulars Rate of DDT
Domestic Company 15% on the gross amount plus surcharge and cess
Foreign Company No DDT
Equity Mutual Fund 10% plus surcharge and cess
Debt Mutual Fund 25% plus surcharge and cess

6. Summary of this Rule

Particulars Taxability of Dividend
Domestic Company. a) In general case, it is not taxable.

b) If the aggregate amount of dividend exceeds Rs. 10 lakh then 10% tax on such excess amount is taxable.

c) it is taxable in the hands of resident individual/HUF/firm.

Foreign Company Taxable in the hands of the recipient as “Income from other sources”.
Deemed Dividend ( Up to 31st March 2018) Taxable
Deemed Dividend (From 1st April 2018) Not Taxable.

Finally, if you like this article, please share it with others. Further, your comments are valuable to me. Please comment on the above article. If there is any rectification required, I will definitely rectify it.


Leave a comment