Dividend income would surely be the most coveted investment yield by someone, especially the one seeking to diversify his/her investment or earn passive income. Indian tax payers must know how to calculate tax on dividend income from various sources as per the need of Income Tax and yet be master of money earnings. As dividend is also earned on other plans such as shares, mutual funds, etc., proper calculation and classification of tax are followed. Below is the explanation of dividend income tax with examples in Indian rupees for better understanding.
Dividend Income Taxation in India
The dividend income received by parties or individuals must be taxed under Income Tax Act, 1961. Dividend income on distribution will not be taxed in the hands of investors because companies and mutual funds were utilised to deduct Dividend Distribution Tax (DDT) prior to the distribution of dividends. Finance Act, 2020, recently repealed DDT and dividend income in the hands of investors is taxed at their own slab rate of income.
Dividend Income from Other Sources
Dividend is received from other sources such as:
1. Company Shares: Dividend is paid by the companies to its investor from its profit.
2. Mutual Funds: Dividend income is paid by some mutual fund schemes to the investors.
3. Foreign Sources: Dividend on foreign company shares can also be credited in the investor account.
All such sources are to be revealed and brought under ‘Income from Other Sources’ in Income Tax Return (ITR).
Procedure to Calculate Tax on Dividend Income
Below is the procedure to calculate tax on dividend income step by step:
Step 1: Allocated Dividend Income
Dividend income received from all sources is to be divided first:
– Indian Public Companies: Dividend received on Indian listed shares.
– Mutual Funds: Some equity-based mutual fund schemes pay dividends periodically.
– Foreign Companies: Foreign dividend thus earned may be required to convert into Indian Rupees (INR).
Step 2: Total Dividend Income
Assume the following dividend incomes of an investor are as given below:
– Indian Company Shares: ₹50,000
– Mutual Funds: ₹20,000
– Foreign Dividend (convertible in INR): ₹30,000
Total Dividend Income = ₹50,000 + ₹20,000 + ₹30,000 = ₹1,00,000
Step 3: Compute Tax Rates Applicable
Dividend income is taxed in tax payers’ slab of income as per Income Tax Act. For example:
– Tax payers’ taxable income is less than 30% slab, it is taxed such a percent of total dividend income.
– 4% additional cess is charged.
Assume tax payer is at 30% slab. Formula is as follows:
Tax on Dividend Income = ₹1,00,000 × 30% = ₹30,000
Health & Education Cess (4%) = ₹30,000 * 4% = ₹1,200
Total Tax Liability = ₹30,000 + ₹1,200 = ₹31,200
Treatment of Dividend Income for Foreign Sources
For foreign business dividend income, the tax will be taxable in India as it is global income, though relief is available under Double Taxation Avoidance Agreement (DTAA), if any. For instance, if tax already paid in foreign country, then only it may be allowed to set off against India tax liability, if terms of applicable DTAA are met.
Main Tax Calculation Points
1. Dividend Exemption: Dividend incomes originating out of an Indian company and mutual fund are exempt, provided your gross total income is below the exemption limit.
2. TDS (Tax Deducted at Source): A rate of 10% TDS can be levied on dividends exceeding ₹5,000 in a scheme or a firm.
3. Interest payable: Investment made on borrowed funds for investment in units of mutual fund or shares can be claimed by investors but limited to 20% of gross dividend received accordingly.
Example: In place of an investment of ₹1,00,000 with dividend of ₹1,00,000 and interest on borrowed funds of ₹10,000 received on such an investment.
Deduction Allowed = 20% of ₹1,00,000 = ₹20,000
As ₹10,000 is an amount less than ₹20,000, the net interest amount can be obtained.
Reporting Dividend Income Under ITR
Dividend income is credited under the head ‘Income from Other Sources’ during the filing of the Income Tax Return (ITR). Investors must report correctly so that they will not be found guilty of the crime of cover-up of income.
Disclaimer
While dividend income is a pleasant return on investment, the tax payers ought to estimate sources and do tax estimates very near. It will become more and more crucial to be mindful of dividend income tax so that planning can be made accordingly. It will be judicious if the investors calculate all the pros and cons of trading in the Indian financial market and seek expert advice for tax planning.
Summary
Dividend earnings, whether from equities of Indian companies, mutual funds, or equities of foreign companies, is taxed in India according to one’s income.
slab. All other dividend income received from sources falls under ‘Income from Other Sources’. Tax is computed after adding the relevant slab rate of income and a 4% cess. Exemptions, adjustment of TDS made by mutual funds or companies, and interest on borrowed funds deduction are the important points to note.
For instance, if an individual gets ₹1,00,000 of dividend income by way of foreign dividends, Indian companies, and mutual funds and is liable for tax in the 30% slab, overall incidence of tax by bringing down all amounts to ₹31,200.
Taxpayers are also asked to report dividend income in ITR returns diligently and follow all the tax regulations so they are not investigated or penalized. Taxpayers are informed here to also think about reviewing the form of regulation of Indian financial markets, risk, and return before investing.