Understanding Dividend Income and related Taxes

Article explains/Contains  What is Dividend, Concept of Record Date, Payment of Unpaid Dividend, Claim of Unpaid Dividend, Transfer of Dividend to IEPF Account, Summary of Dividend Rates, Applicable Surcharge and Cess on Dividend, What is form 15G/15H, Dividend rate on FPI and Link to download the forms 15G, Form 15H and Form 10F.

I -What is Dividend?

The dividend is the benefit provided to shareholders against the shares held in a particular Company. The dividend is of two types:

1. Final dividend-Dividend declared after issuing of Final statements, recommended by the board of directors of a company and declared by shareholders in AGM.

2. Interim dividend-Dividend paid before AGM by the Board of directors of the company.

II-Concept of Record Date

The shareholder as on the record date (cut-off date decided by the Company) is eligible for the credit of the dividend. For example, if the records date of the dividend of Company X is January 10, 2021, then shareholders who held shares of company X on January 10, 2021are eligible for a dividend payout. The record date data is compiled by the registrar based on the details provided by the Depositaries (NSDL and CDSL) along with the Folio details in case of physical shares. The dividend is paid to the shareholder based on this data. The Rate of dividend is calculated by the company.

III-Payment of Unpaid Dividend

Shareholders whose bank details are updated in their Demat Accounts/Folio receive the dividend directly in their bank account via electronic credit. In case of rejection in the credit process and cases where bank details are not available, a physical instrument is issued. Shareholders must update the latest information in their Demat Accounts/Folio for avoiding the hassles in receipt and encashment of Dividends. The validity of such an instrument is 3 months.

IV-Claim of Unpaid Dividend

As per the SEBI circular, SEBI/HO/MIRSD/DOP1/CIR/P/2018/73 dated April 20, 2018; physical Instruments whose validity period has expired shall be cancelled by the Issuer Bank. In case of non-receipt of the warrant/dividend credit and Bank details not available with the Registrar; the shareholder needs to send a Request letter duly signed along with the self-attested PAN and original cancelled cheque to the respective registrar of the company for receiving unpaid Dividends.

V-Transfer of Dividend to IEPF Account

As per section 124(5) of the Companies Act, 2013, a company shall transfer any amount lying pending in Unpaid Dividend Account (unclaimed dividend within 30 days of declaration transferred to this account) for 7 years to the Investor Education and Protection Fund (IEPF) Account. An investor must keep complete track of the equity investments and make sure to claim the entire past unpaid dividends on time.

Furthermore, from the onset of the Finance Act 2020-2021 dividend incomes are liable to tax. Any dividend received on or after April 01, 2020, will be liable to the deduction of tax subject to certain conditions.

VI-Summary of Dividend Rates

Particulars	Rate of Tax	Remarks
Resident individual shareholder Holding valid PAN	10% (Reduced to 7.50% for F.Y 2020-2021i.e May 14, 2020 to March 31, 2021)	Deductible if the Dividend in the receipt is more than Rs.5000/- in one Financial year
Resident individual shareholder not holding PAN or invalid PAN having dividend amount more than 5000/-	20%
Resident non-individual shareholder (HUF, Firm, AOP, BOI, Company) Holding valid PAN.	10% (Reduced to 7.50% for F.Y 2020-2021i.e May 14,2020 to March 31, 2021)
Resident non-individual shareholder (HUF, Firm, AOP, BOI, Company) Holding invalid PAN	20%
Mutual funds	NIL	Exempted if included under section 10 (23D) of the Income Tax Act, 1961, submit the self-attested copy of PAN card and registration certificate to Company/Registrar.
Insurance companies	NIL	Exempted if it provides a self-declaration that the shares are owned by it and it has full beneficial interest along with a self-attested PAN.
Any person for or on behalf of New Pension System – Trust under clause (44) of Section 10 of the Act		Provide a self-declaration that they are specified in Section 10 (44) of the Act.
Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs)	20%+applicable surcharge and cess
Non-resident shareholders other than FIIs/ FPIs	20%+applicable surcharge and cess	Where a non-resident shareholder is eligible to claim the tax treaty benefit and the tax rate provided in the respective tax treaty is beneficial to the shareholder then the rate as per the tax treaty would be applied. Shareholders have to provide – Request letter duly signed by the shareholder for deduction of tax at lower rate stating: Non-resident does not have a place of effective management in India Dividend income is not related to PE in India. The claimant is the beneficial owner of the Dividend Income. 2.      Self-attested copy of PAN. Self-Attested copy of the Tax Residency Certificate (TRC). Self-declaration in Form 10F duly filled and signed

Note-If Lower/ NIL withholding tax certificate obtained from tax authority is submitted under section 197, the tax will be withheld at the rate specified in the said certificate. The investor must provide a self-attested copy of such a certificate. The certificate should be valid for F.Y 2020-2021 and should cover the dividend income.

VII-Applicable Surcharge and Cess on Dividend

Type of Investor	Dividend amount	Rate of Surcharge	Effective Tax Rate (Including Surcharge and cess @4%)
Non Residents, Hindu Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI)	0 to ₹ 50 Lacs	NIL	20.80% (20%+20*4%)
	Above ₹ 50 Lacs but not exceeding ₹ 1 Crore	10%	22.88% (20*110%+4%)
	Above ₹ 1 Crore but not exceeding ₹ 2 Crore	15%	23.92% (20*115%+4%)
	Above ₹ 2 Crore but not exceeding ₹ 5 Crore	15%	23.92% (20*115%+4%)
	Above ₹ 5 Crore	15%	23.92% (20*115%+4%)

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Type of Investor	Dividend amount	Rate of Surcharge	Effective Tax Rate (Including Surcharge and cess@4%)
Non Resident companies	0 to ₹ 1 Crore	NIL	20.80% (20%+20*4%)
	Above ₹ 1 Crore but not exceeding ₹ 10 Crores	2%	21.22% (20*102%+4%)
	Above ₹ 10 Crores	5%	21.84% (20*105%+4%)

Type of Investor	Dividend amount	Rate of Surcharge	Effective Tax Rate (Including Surcharge and cess@4%)
Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs)	0 to ₹ 50 Lacs	NIL	20.80% (20%+20*4%)
	Above ₹ 50 Lacs but not exceeding ₹ 1 Crore	10%	22.88% (20*110%+4%)
	Above ₹ 1 Crore but not exceeding ₹ 2 Crore	15%	23.92% (20*115%+4%)
	Above ₹ 2 Crore but not exceeding ₹ 5 Crore	25%	26% (20*125%+4%)
	Above ₹ 5 Crore	37%	28.50% (20*137%+4%)

VIII-What is form 15G/15H?

15G (for individuals less than 60 years of age and HUF) is a self-declaration form to be submitted only in case the shareholder’s tax on the estimated total income for FY 2020-2021 is NIL. In the case of senior citizens, 15H is applicable (case of age above 60 years).

IX-Dividend rate on FPI?

Currently, FPI is liable for a dividend at the rate of 20% plus applicable surcharge and cess but the Budget 2021-2020 has proposed to give tax treaty benefit to such Investor subject to certain conditions (Refer Point V- Non-resident shareholders other than FIIs/ FPIs). This would lead to a Tax deduction by FPI’s at Lower Rate similar to Non-Residents shareholders.

X-Link to download the forms

The investor may download the forms mentioned above (Links provided below) submit the same to the Registrar/company before the cut-off date as provided by the company for acceptance of the requisite form.

Form 15G- https://www.incometaxindia.gov.in/forms/income-tax%20rules/103120000000007845.pdf

Form 15H- https://www.incometaxindia.gov.in/forms/income-tax%20rules/103120000000007846.pdf

Form 10F- https://www.incometaxindia.gov.in/Forms/Income-Tax%20Rules/103120000000007197.pdf