For dividends distributed on or after 1st April, 2020, Domestic Companies/Mutual Funds are not liable to pay Dividend Distribution Tax (DDT). Dividends received are taxable in the hands of the shareholders/unit holders. Finance Act, 2020 abolished DDT and withdrew the exemptions u/s 10(34) of the Income Tax Act.
The tax treatment on Dividend Income varies according to the residential status of the shareholders/unit holders.
Resident Indians
Under Section 194, TDS (Tax Deducted at Source) @10% (20% in case of no PAN) is imposed if dividend income in a fiscal year is in excess of Rs 5,000. Dividends received are added to the total income of the shareholders/unit holders and taxed as per marginal rates of tax. TDS credit can be claimed at the time of filing income tax return. Tax payers whose total income (including Dividend Income) is below the Basic Exemption Limit can submit either Form 15G or 15H (applicable in case of Senior Citizens) for claiming Dividend Income without TDS. The shareholder/unit holder can claim deduction of interest expense incurred to earn dividend income to the extent of 20% of total dividend income. Dividends received from a foreign company are also added to the total income and taxed as per applicable tax slabs. In this case too, shareholders/unit holders can claim deduction of interest expenditure incurred to earn dividend to the extent of 20% of total dividend income.
Non Resident Indians
In the case of non-resident person (including FPIs and non-resident Indians (NRIs)), the dividend income is taxable at the rate of 20% without any deductions. The TDS (Tax Deducted at Source) rate is 20% subject to Double Taxation Avoidance Agreement (DTAA), if any. In order to avail lower TDS, the shareholder/unit holder needs to furnish documentary proofs like Form 10F, declaration of beneficial ownership, tax residency certificate etc. If there is no documentary proof, higher TDS will be deducted which can be claimed at the time of filing Income Tax Return. Applicable Surcharge and Health & Education Cess (HEC) @4% are also levied.