Taxation of Dividend – Applicable TDS Rates
Budget 2020-21 has come up with some considerable changes in various provisions of the Income Tax Act, 1961. One of such provision, where taxpayers are primarily involved is the taxation of Dividend. The dividends received up to 31st March 2020 were broadly exempt in the hands of the recipient. However, the company or mutual fund paying the dividend was required to pay a dividend distribution tax.
The Budget 2020-21 has changed the provisions pertaining to the taxation of dividend and shifted the tax incidence by imposing the liability to pay tax on the shareholders/unitholders. The companies and mutual funds would not have to pay dividend distribution tax on the dividends declared after 1st April 2020. Instead, the dividend shall be taxable in the hands of the recipient at the applicable slab rates.
A deduction under section 57 can be claimed on account of “interest expense” incurred against earning such dividend income. However, such deduction is capped at 20% of the dividend income received. Further, Section 115BBDA shall not for the dividends declared after 1st April 2020.
The Budget 2020-21 also requires domestic companies and mutual funds to deduct tax on dividend income distribution at the rate of 10% per recipient under section 194 / 194K of the Act. However, such TDS shall be applicable only if the dividend receipt from a company or mutual fund exceeds Rs 5,000/- annually. The tax shall be deducted on the entire amount of dividend income if the amount paid to a recipient exceeds Rs. 5000/- Further to clarify, the TDS shall be attracted only to the dividend income and not to the capital gains in case of Mutual Funds.
From 14th May, 2020 for Financial Year 2020-21, in order to restore liquidity among the taxpayers, temporary relief of reducing several tax rates by 2.5% was announced. Therefore, the rate of TDS stands reduced to 7.5% in the case of dividends also, paid till 31st March 2021.
The simplified and tabular representation of TDS rates on dividends as per the Income Tax Act for Financial Year 2020-21 (w.e.f. 14th May, 2020) categorised further on the basis of taxpayers is as follows:
| S No | Particulars | Section | TDS Rates |
| (a) | Dividend payments to Residents | 194 | |
| · Payment made up to Rs. 5,000 | 0% | ||
| · Payment made to LIC, GIC or any other approved insurer | 0% | ||
| · Other residents | 7.5% | ||
| · Resident submitted Form 15G / Form 15H | 197A | 0% | |
| · Resident not having PAN | 206AA | 20% | |
| (b) | Dividend payment to: | 196 | |
| · The Government | 0% | ||
| · the Reserve Bank of India | 0% | ||
| · a corporation established under a Central Act which is, under any law for the time being in force, exempt from income tax on its income, | 0% | ||
| · a Mutual Fund mentioned under section 10(23D) | 0% | ||
| (c) | Dividend payment to Foreign Institutional Investors | 196D | 20% |
| (d) | Dividend payments to Non-Residents excluding Foreign Institutional Investors* | 195 | Rates in Force |
| · Non-resident Indian (presently, rates in force) | 20% | ||
| · Foreign Company (presently, rates in force) | 20% | ||
| · Any other person (presently, rates in force) | 20% |
* Further, the rates have to be increased by surcharge and health and education cess:
| Category of Dividend Recipient | TDS (Dividend < ₹ 50 lakhs) | TDS (Dividend > ₹ 50 lakhs but < ₹ 1 crore) | TDS (Dividend > ₹ 1 crore but < ₹ 10 crores) | TDS (Dividend > ₹ 10 crores) |
| Non-Resident Indian | 20.80% | 22.88% | 23.92% | 23.92% |
| Foreign Company | 20.80% | 20.80% | 21.22% | 21.84% |
| Any other person | It is to be decided on an individual basis based on the constitution of the person. | |||
The taxation of dividend in the hands of individuals will increase the compliance burden on companies as well as individuals.