Dear friend’s now days, many people has started their investment journey in Stock Market. Some are investing directly in share market and some are investing through mutual funds. Any profit/ loss earned on these transactions are categorized as Long Term/ Short Term Capital Gain/ Capital Loss. If we hold shares/ mutual funds of dividend paying company on record date then dividend is given to us. In today’s topic, we will discuss about taxability of this Dividend Income.
Few years back, dividend income is exempt in hands of taxpayers because company is paying DDT at the time of distribution of dividend however, after 2020 it is made taxable in the hand of taxpayers and company need not to pay any DDT on this announced dividend. Below are some of FAQ’s that are asked related to taxability of Dividend.
What is the meaning of Dividend?
Dividend usually refers to the distribution of profits by a company to its shareholders. However, in view of Section 2(22) of the Income-tax Act, the dividend shall also include the following:
(a) Distribution of accumulated profits to shareholders entailing release of the company’s assets;
(b) Distribution of debentures or deposit certificates to shareholders out of the accumulated profits of the company and issue of bonus shares to preference shareholders out of accumulated profits;
(c) Distribution made to shareholders of the company on its liquidation out of accumulated profits;
(d) Distribution to shareholders out of accumulated profits on the reduction of capital by the company; and
(e) Loan or advance made by a closely held company to its shareholder out of accumulated profits.
What changes were introduced in the tax treatment of dividends from domestic companies after April 1, 2020?
Before April 1, 2020, dividends were tax-exempt for shareholders, and companies paid Dividend Distribution Tax (DDT). Post-April 1, 2020, DDT was abolished, and dividends became taxable in the hands of shareholders.
I am short term swing traders and received dividend of Rs.50000/- during the year, under which income head my dividend is taxable?
As a short-term swing trader who received a dividend of Rs. 50,000 during the year, the dividend income would be taxable under the head “Income from Other Sources.” Dividend income is generally categorized under this head in the income tax return. It is important to report this income accurately when filing your tax return and the applicable tax rates for the income from other sources will be applied to determine the tax liability on the received dividend.
What is the tax rate applicable on my dividend income received?
The tax rate applicable on dividend income received as an investor would be as per the normal tax rates applicable to person and income is taxable U/h “Income from Other Sources.”
Whether any expenditure is allowed against dividend income received?
Yes, certain expenditures are allowed against dividend income received, but they are limited.
Deduction for Interest Expenditure:
- The assessee (shareholder) can claim a deduction for interest expenditure that has been incurred to earn dividend income.
- However, the deduction is limited to 20% of the total dividend income.
No Deduction for Other Expenses:
- No deduction is allowed for any other expenses, including commission or remuneration paid to a banker or any other person for the purpose of realizing such dividend.
In summary, while there is a provision for a deduction related to interest expenditure, it is subject to the 20% limit of the total dividend income. Other general expenses incurred in earning dividend income are not eligible for deduction.
What are the tax obligations for domestic companies regarding dividends?
Domestic companies are not liable for Dividend Distribution Tax (DDT). Instead, they must deduct tax at a rate of 10% under Section 194 if the aggregate dividend to a resident shareholder exceeds Rs. 5,000.
During the previous year, I have received a dividend of Rs.2050/- but during ITR Filing, I have not disclosed this Income. Whether, there will be any problem in future?
As discussed earlier, dividend is taxable in the head of recipient and taxable at the slab rate. As of now, all dividends are reflecting in AIS Report. Non disclosure of this dividend income tantamount to under reporting of income, which may invite notice from department.
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Disclaimer: This article is for the purpose of information and shall not be treated as solicitation in any manner and for any other purpose whatsoever. It shall not be used as legal opinion and not to be used for rendering any professional advice. The author will not be held responsible for any lose, if occur after using above information. Kindly consult your professionals before taking any action. This article is written on the basis of author’s personal experience and provision applicable as on date of writing of this article. Adequate attention has been given to avoid any clerical/arithmetical error, however; if it still persists kindly intimate us to avoid such error for the benefits of others readers. The Author “CA. Shiv Kumar Sharma” can be reached at mail –shivsharma786@gmail.com and Mobile/WhatsApp–9911303737
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