Do you receive dividends on a regular basis? Beware! This year, you must pay tax and report it on your ITR.

Many consumers choose the dividend payment option while investing in mutual fund (MF) schemes in order to receive regular income while remaining invested. People who invest in direct equity can get dividends based on the amount of profit made by the companies.

Dividend income is now taxed differently.

Companies and fund houses had to pay Dividend Distribution Tax (DDT) before distributing dividends until the fiscal year (FY) 2019-20, while dividend amounts received were tax-free in the hands of investors.

As a result, investors used to get the same tax treatment regardless of their tax status.

However, since the repeal of DDT, things have changed, and dividend income is now taxable in the hands of investors.

“The Finance Act of 2020 altered the provisions of the Income Tax Act of 1961 (“the Act”) relating to the taxation of dividend income. Dividends were previously taxed in the hands of the firm paying the payout. Dividend Distribution Tax (DDT) was due from the firm paying the dividend under section 115-O of the Act. Dr. Suresh Surana, Founder, RSM India, added, “Moreover, such dividend received was exempt in the hands of shareholders u/s 10(34) of the Act.”

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As a result, investors in higher tax bands must pay a higher tax rate on dividend income than investors in lower tax brackets.

“The Finance Act of 2020 repealed the DDT concept and made dividends taxable in the hands of shareholders in accordance with the traditional dividend taxation system.” The modification took effect on April 1, 2020. As a result, for dividends paid on or after April 1, 2020, the firm distributing the dividend is not obligated to pay Dividend Distribution Tax (DDT), and the dividends are taxable in the hands of shareholders at the slab rates applicable to them,” Dr. Surana explained.

Tax rate

“As per section 56(2)(i) of the Act, dividends would typically be taxable under the head “Income From Other Sources” unless the shares are kept for trading purposes, in which case they would be subject to tax as Business income,” Dr. Surna explained. They will be taxed at the taxpayer’s standard rate of taxation. In addition, under section 57, the taxpayer cannot deduct any expense from dividend income other than interest on money borrowed for investment purposes. The interest expense deduction will likewise be limited to a maximum of 20% of the amount of gross dividends.

TDS level

Companies and investment houses are now required to deduct tax at source (TDS) as dividend income has become taxable.

In relation to dividends given to residents, Section 194 of the Act provides TDS provisions. The firm distributing dividends must deduct 10% tax at the time of payment or distribution of dividends, according to this section. When a dividend is paid to a resident individual in any manner other than cash and the amount is less than Rs 5,000, TDS is not deducted. TDS provisions u/s 195 will apply to dividends given to non-residents, with a rate of 20% established by the Act. Non-resident shareholders, on the other hand, can take advantage of the withholding rates set forth in the tax treaties that their country has signed with India.

You can get the extra TDS amount back if your income is not taxable or if you are in the 5% tax level. Otherwise, depending on your income level, you will have to pay more tax than the TDS rate.