Dividends, under the Income Tax Act, 1961 are also subject to taxation. That's right, your hard-earned dividends won't go untaxed. But wait, there's more! For the 2023-2024 assessment year, the regulations governing the taxation of dividend income have been given a makeover. These changes are substantial and cannot be ignored by taxpayers. To ensure you stay on the right side of the law and avoid those pesky fines, it's essential to keep up with tax law developments and maintain meticulous records. So, let's dive into the nitty-gritty of how dividend income should be reported when calculating taxable income in India for the assessment year 2023-2024.
Taxation of Dividend Income
Investors seeking a passive return on their capital frequently turn to dividends. When individuals invest in shares or mutual funds, they can receive a form of income known as dividends. Dividends are a kind of corporate earnings that are paid out to shareholders or mutual fund investors. Companies and mutual fund schemes offer dividends to investors as a means of generating a regular income from their investments, which supplements any potential gains from selling their shares or units at a higher price.
Let's review how dividend income is taxed in India before diving into the assessment year 2023-2024 treatment details. The Income Tax Act of 1961 classifies dividend income as "Income from Other Sources" for tax purposes. Dividends are subject to taxation at the individual's normal income tax rate. Prior to the revision of the Finance Act, 2021, however, corporations that paid dividends were hit with a Dividend Distribution Tax (DDT) of 15% of the total dividends paid out.
To counteract this, on April 1, 2020, the Dividend Distribution Tax (DDT) will no longer exist, and the burden of taxation for dividends will transfer to the dividend receiver. Individual dividend income is now subject to taxation at the individual's normal income tax rate.
Income Tax Deducted from Dividends
Not only have the rules of taxation of dividend income been altered, but the dividend itself has also been reclassified. Dividends in excess of Rs. 5,000 each financial year will be subject to TDS (Tax Deducted at Source) deductions by firms beginning on 1st April 2021. Before a dividend is distributed to a shareholder, the corporation must deduct this TDS and pay it over to the government.
The taxpayer's Form 26AS, a record of the taxes withheld, collected, and remitted on their behalf, will show the TDS that was taken out of their dividend checks. This means that filers can consolidate their dividend income and tax deductions into a single line item on their 1040.
The 10% TDS rate applies only if the dividend-paying corporation has the taxpayer's Permanent Account Number (PAN). The TDS rate is 20% if the PAN is not provided.
Tax Prepayments and Dividend Payments
People often make projected tax payments at the beginning of the fiscal year. When determining a person's tax obligation for the coming year, dividend income is taken into account. The Income Tax Act of 1961 mandates that taxpayers make quarterly anticipated tax payments in the amount of Rs. 10,000 or more if their tax due is expected to be more than that at the end of the year.
Individuals' dividend income advance tax liabilities are determined by their marginal tax rates. Since TDS is applicable to income from dividends, the amount of TDS deducted on the same is also factored into the calculation of the advance tax liability. For instance, If an individual expects to owe Rs. 1 lakh in taxes this year and has already paid Rs. 5,000 in tax on Rs. 50,000 in dividend income, their advance tax due will be determined as follows.
Income Taxes Due on All Earnings (Including Dividends) = 1 Lakh
Less: The Standard Dividend Tax Rate is 5%, or Rs.
Taxes Owed in Advance = 95,000 Indian Rupees
Dividend Received From Foreign Company
Under the Income Tax Act, any dividend received from a foreign company is regarded as income from other sources and is subject to taxation. The taxpayer must include the entire dividend amount from the foreign company in their total income, which will be taxed according to the applicable tax slab. Deductions on interest expenses up to a maximum of 20% of the gross dividend income are also applicable. Knowing the tax liabilities associated with dividend income can help taxpayers manage their investments and expenses more efficiently, and claim maximum benefits. It is essential to have a good understanding of the rules regarding taxation on dividend income to ensure compliance with tax regulations.
Overall, for the tax year 2023-2024, there have been substantial changes to how dividend income is handled in India. With the elimination of the Dividend Distribution Tax, the onus of paying taxes on dividend income has shifted to the dividend receiver. In addition, since the implementation of TDS on dividend income, businesses are obligated to withhold 10% of dividend income in excess of Rs. 5,000 per financial year.
The calculation of advance tax, in which taxpayers are expected to pay tax on their estimated income for the year, has also been affected by this shift in tax liability. TDS on dividend income allows taxpayers to factor in the amount of tax withheld from dividends when estimating their future tax bill.
To guarantee correct reporting of income in income tax returns, taxpayers must keep careful records of all dividend income received and TDS deducted. Further, to avoid a higher TDS rate of 20%, taxpayers should also ensure that their PAN is up-to-date with the entities from which they receive dividend income.