Dividend received from an Indian company was exempt until 31 March 2020 (FY 2019-20). That was because the company declaring such dividend already paid dividend distribution tax (DDT) before making payment.
However, the Finance Act, 2020 changed the method of dividend taxation. Henceforth, all dividend received on or after 1 April 2020 is taxable in the hands of the investor/shareholder.
The DDT liability on companies and mutual funds stand withdrawn. Similarly, the tax of 10% on dividend receipts of resident individuals, HUF and firms in excess of Rs 10 lakh (Section 115BBDA) also stands withdrawn.
The Finance Act, 2020 also imposes a TDS on dividend distribution by companies and mutual funds on or after 1 April 2020.
The normal rate of TDS is 10% on dividend income paid in excess of Rs 5,000 from a company or mutual fund.
However, as a COVID-19 relief measure, the government reduced the TDS rate to 7.5% for distribution from 14 May 2020 until 31 March 2021.
The dividend income is the taxable income of Mr. X taxed at the slab rates applicable for FY 2020-21 (AY 2021-22).
The Finance Act, 2020 also provides for deduction of interest expense incurred against the dividend. The deduction should not exceed 20% of the dividend income received. However, you are not entitled to claim a deduction for any other expenditure incurred for earning the dividend income.
For the example Neeraj has earned dividend of Rs.6,000 from an India company and Rs.6,000 Mutual fund because of that dividend income more than 5000. In such case TDS deducted under section 194 and 194K respectively to be deducted at the rate of 10%.
Let assume that Neeraj borrowed money to invest in equity share and mutual fund paid interest of Rs.4700 during the F Y (2020-2021).but only Total deduction allowed of Rs.2400 i.e. (20% of Dividend receive each OR actual paid Whichever is Lower)
A resident individual and Senior Citizen receiving dividends whose estimated annual income are below the exemption limit can submit form 15G/15H to the company or mutual fund paying the dividend.
Dividend Received from Foreign Company
Dividend received from a foreign company is taxable. It will be charged to tax under the head “income from other sources.”
Dividend received from a foreign company will be included in the total income of the taxpayer and will be charged to tax at the rates applicable to the taxpayer.
Even in the case of foreign dividend, the investor can claim deduction only for the interest expense restricted to 20% of the gross dividend income.
To sum up, the new provisions introduced by Budget 2020 has shifted the burden of payment of tax on dividend income from the distribution company to the recipient of such dividend income.