Dividend Taxation – Till FY 2019-20

  • Dividend is reward or incentive which a shareholder gets on the shares held by him in a company.
  • Till the FY 2019-20, as per Indian Income Tax Law (Sec 115O), dividend was taxable in the hands of company. Company was liable to pay a tax in the name of Dividend Distribution Tax (DDT) on declaration of dividend to shareholders. Though the DDT rate was 15% (plus Surcharge 15% and Cess 4%), however, after grossing up the effective DDT was 20.36%.
  • Since, the taxation of Dividend was imposed on the Companies, hence, the Dividend received was exempt in the hands of the shareholder (Sec 10(34)).
  • Till the FY 2018-19, Dividend was completely exempt in the hands of Shareholders. Then, Govt shows its intention to tax dividend in the hands of shareholders. And Wef FY (under section 115BBDA), in addition to DDT, taxability has been levied on big shareholders by imposing tax to all the shareholders whose aggregate income from the domestic companies was in excess of Rs 10 lakhs. Under this provision, if dividend income goes above 10Lakhs, the excess of amount which was over and above 10lac, was taxable. Hence, double taxation for big shareholders. This position remains for two years till FY 2019-20.
  • Till FY 2019-20, Dividend Taxation in the hands of Non-Residents (NRIs, OCIs) was exempt. Even section 115BBDA was not applicable to Non-residents. Hence, NRIs OCIs were enjoying exemption for dividend income in India. Consequently, there was no TDS also in India on their Dividend Income. However, in their home country (country where they were resident), dividend income was taxable as per the laws of their home country. Here, the adverse thing was that the Non-residents were not eligible for DDT which Indian company was paying to Govt of India. Hence, indirectly paid taxes in India (in the form of DDT) was not available as foreign tax credit in their home country. This is because DDT was not covered in Double Tax Avoidance Treaties of the Countries. Hence, this was a pain for NRIs, OCIs, Foreign Companies.

Budget 2020 – Effective FY 2020-21

  • In Budget 2020 (i.e. effective from FY 2020-21), the erstwhile system of dividend taxation is reintroduced. Hence, now wef FY 2020-21 (i.e AY 2021-22), dividend is taxable in the hands of shareholder.
  • Wef 2020-21, there will be no DDT. TDS system is back in force, hence, U/s 194 TDS @10% will be applicable on dividend paid by the company (applicable if dividend exceeds Rs 5000). For Non-residents, TDS will be deducted u/s 195, 196D etc (as per applicable rates).
  • This new provision is applicable on dividend on shares as well mutual funds.
  • The new provisions of dividend taxation are same for Residents as well Non-residents.

New Dividend Tax Impact

  • The new dividend taxation comes as a big relief for big shareholders as the section 115BBDA is no more effective now. Hence, single taxation for big shareholders (earning dividend more than Rs 10 Lakh).
  • Non-residents (NRIs, OCIs, Foreign Companies) are also very happy now as they can claim the Withholding Tax (TDS) on Dividend as Foreign Tax Credit in their home country.
  • New Law will provide Govt higher tax rate (i.e. 30% tax + surcharge & cess, comparing to DDT 20.36%). Individuals/HUF, with more than 2 crore or 5 crore income, will have to pay more surcharge (i.e. 25% or 37% accordingly). Hence, more taxes to Govt.
  • There will be a burden on assesses to correctly submit their dividend income in the ITR form to avoid tax department notices, as Govt tax department (under automated system) will verify the ITR data with the Company dividend paid data.
  • Companies will have to comply more procedural work by complying with the TDS provisions in relation to each dividend payment.

New Dividend Taxation Rules (Wef FY 2020-21) – NRIs, OCIs, Other Non-Residents

  • Dividend Tax Vs TDS Rates: Taxation of dividend in relation to Non-residents vary differently. Prevailing Tax Rates as well Withholding Tax Rates in relation to Non-residents Dividend are as under:
    Recipient of Dividend Income Tax Rate TDS Rate
    FIIs 20% (Sec 115AD) 20% (Sec 196D)
    NRIs, OCIs 20% (Sec 115A) 30% (Sec 195)
    Foreign Companies (other than FIIs) 20% (Sec 115A) 40% (Sec 195)
  • Dividend Tax – DTAA: In relation to Non-residents, resident of those countries which has a Tax Treaty with India, a lower tax rate (as compared to Indian domestic tax rates – as mentioned in above table) will be levied. In most of DTAAs between India Vs Other Countries, tax on dividend is 10% or 15%. Hence, by availing benefit of DTAA, a lower rate of tax can be enjoyed by Non-residents. However, for this they need to provide Tax Residency Certificate (TRC) of their resident country to Indian Company.
  • Dividend Tax – Foreign Tax Credit: Under earlier law (DDT), Non-residents were unable to avail credit of DDT taxes in their Residence Country. However, under the new rule of dividend taxation, Indian Company will deduct TDS on dividend payment, which can be claimed as Foreign Tax Credit (as per the DTAAs) by the Non-resident (NRIs, OCIs, FIIs).
  • Dividend Tax – Seafarers, Mariners: Generally, seafarers and mariners are Non-residents in India. Hence, their dividend taxation will be similar to NRIs, OCIs. However, they will not be able to enjoy the benefit of DTAA as they are not resident of any country.
  • More Work For Companies: Companies will have to face more procedural works in relation to Non-Resident Dividend. There may be different TDS rates as per different categories of Non-residents (based on their category, DTAA rate etc). Further, companies will have to face compliance of 15CA and 15CB as well for payment to Non-residents.

Frequently Asked Questions - FAQs - Dividend Tax Laws In India - NRIs, OCIs

Q: Whether NRIs/OCIs/Foreign Companies have to pay tax on Dividend Income in India? Can NRIs, OCIs claim tax paid in India as foreign tax credit in their residence country?

Ans: Yes, NRIs/OCIs/Foreign companies have to pay taxes on Dividend in India. As per the applicable TDS provisions, generally section 195, TDS will be deducted on their Dividend income in India by the Dividend paying company. Non-residents (NRIs, OCIs, Foreign Companies) can claim a tax credit of this tax payment in their country where they are tax resident.

Q: Whether there is a beneficial tax rate available to Non-residents (NRIs, OCIs, Foreign Companies) under DTAA? What documents are needed to claim DTAA tax rates benefit?

Ans: Under the provisions of section 90 of Income Tax Act, tax rates of DTAA can be enjoyed by the assessee if the same is more beneficial. As per most of DTAAs between India and Other country, tax on Dividend is provided @10% or 15%. Hence, in general, DTAA rate is more beneficial than the India Domestic Tax Rate. Hence, Non-Residents (NRIs, OCIs, Foreign Companies) can apply for DTAA rates over Indian Tax Rate in relation to Dividend. For the same, they need to provide Indian Company their Tax Residency Certificate (TRC) of the country of their residence.

Q: Basic dividend related queries explained in above blog?

Ans: Following related information is covered in above blog:

  • Non Resident Dividend Taxation
  • NRI Dividend Taxation
  • Dividend Tax Impact On Non-Residents
  • FY 2020-21 Dividend Tax Rules India