Tax Talk: How to calculate tax on dividend income

For non-resident shareholders, tax is required to be withheld at the rate of 20%, subject to beneficial tax treaty rate, if available.

By Neha Malhotra

With abolition of Dividend Distribution Tax (DDT), dividend declared/ distributed on or after April 1, 2020 is taxable in the hands of the recipient shareholders. Transitional dividends (i.e. declared before the cut-off date and distributed later), shall remain subject to DDT. Restoration of the classical system has led to revival of corresponding enabling provisions that permit deduction of expenses, deduction of tax at source (TDS), treaty relief for non-residents, etc.

Compliance obligation on shareholders
Dividend income from shares held as investment shall be taxable under head ‘other sources’ in the hands of recipient  shareholders at applicable slab rates. As per the provisions of the Income Tax Act, final dividend is taxable in the year in which it is declared, distributed or paid, whichever is earlier and interim dividend is taxable in the year when such dividend is received by the shareholders.

For resident shareholders, dividends and income from mutual funds is subject to TDS at the rate of 10%, if the amount received by the individual exceeds Rs 5,000 in a year. The tax so deducted shall be available as credit from the final tax liability of the taxpayer, at the time of filing of return of income. For non-resident shareholders, tax is required to be withheld at the rate of 20%, subject to beneficial tax treaty rate, if available.

However, non-resident shareholders would be required to furnish various documents such as Tax Residency Certificate, Form 10F, declaration of beneficial ownership, etc. in order to claim tax treaty benefits. Else, the Indian company distributing dividend, may deduct tax without accounting for the beneficial treaty rate. In such a case, lower tax treaty rate shall have to be claimed by filing tax return in India.

Pertinently, non-resident shareholders are exempted from filing a tax return if their total income consists of dividend income or any prescribed passive income (like interest) and tax has been withheld at rate specified in the Act. Therefore, only if a lower tax treaty rate is claimed, non-residents shall have to furnish a return of income disclosing dividend income and tax deducted thereon.

Deduction of expenses
As per the new provisions, a taxpayer may claim deduction of interest expenditure that has been incurred by him to earn the dividend income, subject to the limit of 20% of such income. No other expense, like commission or remuneration paid to banker/ broker shall be allowed to be claimed.

Further, income tax provisions require taxpayers to pay advance tax instalments, if estimated tax liability exceeds Rs 10,000 in the relevant year. In the event of non-payment/ short payment, interest at prescribed rates is charged on the amount of shortfall. However, recognising the nature of dividend income and the probable difficulties in accurate determination of advance tax thereon, the law has provided that if shortfall in payment of advance tax is on account of dividend income, no interest would be levied, provided the taxpayer pays full tax in subsequent advance tax instalments.

What to do?
With the end of the financial year on March 31, 2021, it is time for filing of income tax returns before the end of July this year. In order to ease compliance, details of dividend income will now be pre-filled in Income Tax Return Forms and can be downloaded from the income tax portal.

The writer is director, Nangia Andersen India. With inputs from Vasudha Arora