How much is Tax on Dividend Income

Seep Gupta
Seep Gupta at August 05, 2022
How much is Tax on Dividend Income

A dividend is a type of income that a person receives if he or she invests in shares or mutual funds. Such types of dividends received by the people who invest in shares and mutual funds are a type of income. Many shares and mutual funds schemes distribute these dividends to their investors. However, it is uncertain whether dividends are taxed or not, if yes, then the question arises regarding how they are taxed, we will know more in this article.

Source of Dividends

There are a plethora of sources of dividends. One can receive dividends from the following sources These are mentioned below:

  • One can receive dividends from the domestic company in which one has invested his or her shares.
  • One can also receive dividends from a foreign company in which one has invested his or her shares.
  • From equity mutual funds if the person has chosen the dividend option.
  • From the debt mutual funds if the person has chosen the dividend option.

These are the sources by which one can receive dividends.

Taxability of Dividend Income

Provisions related to the taxability of dividend income are given below. These include both old and new provisions.

  • Taxes on the dividends received from an Indian company were exempted from taxation until the 31st of March 2020 i.e the financial year of 2019-20. It was due to the reason that the DDT was already paid on such dividends before making the payment. DDT stands for Dividend Distribution Tax.
  • However recently, the Finance Act, of 2020 has changed the procedure as to how dividend income will be taxed. From now on, all the dividends received on or after the 1st of April, 2020 are taxable in the hands of individual investors and shareholders.
  • The DDT or division distribution tax liability and mutual funds stand withdrawn on companies now. Similarly, 10 per cent of tax in excess on dividend receipts of resident individuals, Hindu Undivided Families and firms in excess of Rs 10 lakhs (included in the Section 115BBDA) also stands withdrawn.

Also, the taxability of dividend income depends upon whether dividends receive deals in securities either as a trader or as an investor. The income will be taxed under the head business income if a person earns an income from trading activities. The dividend will be taxed under the head of business or profession if the shares are held for trading purposes.

If a person is holding shares as an investment, then the income arising from that dividend will be taxable under the head of income from other sources.

When to Tax Dividend Income?

According to section 8 of the Finance Act, the Dividend income shall be taxable in the year in which it is declared, distributed, and paid by the company. It is done out of whichever option is earlier. Whereas, in the case of an interim dividend, it is taxable in the previous year in which the amount of such dividend is unconditionally made available by the company to the shareholder. In other words, it can be concluded that an interim dividend is taxable on a receipt basis.

Advanced Tax on Dividend Income

No interest under Section 234C shall be charged if the person has failed to pay an advanced tax installment on an account of dividend income. However, it should be provided that the assessee has paid full tax in subsequent advance tax installments. However, this benefit is not available for deemed dividends.

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