Income tax on dividends: Here are the key things to know

The provisions on tax on dividend income witnessed a major overhaul with the introduction of the Finance Act, 2020. The Act shifted the liability of tax on dividend from the companies declaring them to the individuals receiving the amount.

As per the Finance Act 2020, Tax Deducted at Source (TDS) is imposed on dividends paid by companies and mutual funds on or after April 1, 2020.

For residents, TDS is deducted at 10 percent rate on the amount of dividend. For non-residents, it is deducted usually at 20 percent plus applicable cess and surcharge.

No TDS is applicable if the dividend to an individual shareholder — who is a resident — does not exceed Rs 5,000 in a fiscal year. The TDS free limit or the threshold of Rs 5,000 does not apply in case the shareholder is a Hindu Undivided Family (HUF), firm, company, trust, etc.

No TDS is deducted if an individual furnishes a lower/NIL TDS certificate to the dividend paying company.

The Finance Act 2020 also laid provisions to claim exemption of expense incurred for obtaining the dividend. For such claim exemption, the conditions are:

A maximum deduction of 20 percent of the gross dividend income is applicable.

Only expenses incurred against obtaining the dividend such as interest on a loan taken to invest in equity shares, collection charges, etc. are counted for the deduction.

Salary expenses incurred for earning the dividend income or commission are not considered for any deduction.

Dividends received from a foreign company are also eligible for expense exemption at a maximum limit of 20 percent of the gross dividend income.