Income Tax return filing: Is dividend from shares or mutual fund taxed?

A resident individual receiving dividends whose estimated annual income is below the exemption limit can submit Form 15G paying dividend

As the last date to file Income Tax returns nears, the topic of taxes on dividends received from investments in company shares or mutual funds could be confusing. A common question is whether a recipient has to pay taxes on dividends received from a listed company.
 

Before the Finance Act, 2020, dividends were exempt from tax in the hands of the shareholders/unit holders. This was because the company or mutual fund paying the dividend was liable to pay Dividend Distribution Tax (DDT) before making the dividend payment. However, the Finance Act, 2020 abolished the DDT and shifted the taxability of dividends to the recipient. This means that dividends received by individuals, Hindu Undivided Families (HUFs), and firms from domestic companies and mutual funds are now taxable according to applicable Income Tax slab rates.

 

Taxation of dividend income

 

The dividends are to be reported under the ‘Income from other sources’ head in the Income Tax return (ITR) form. Taxpayers can claim a deduction of up to 20 per cent of the gross dividend income towards the interest expense incurred to earn such dividend income. However, no other expenses like commission or remuneration paid to a banker can be claimed as a deduction.

 

“The taxation of dividends received from shares and mutual funds has undergone significant changes over the years. As of the current tax laws, dividends received from shares and mutual funds are taxable in the hands of the investor. For instance, if an individual receives a dividend of Rs 10,000 from equity shares and Rs 5,000 from mutual funds in a financial year, this total of Rs 15,000 is added to their income and taxed according to their applicable income tax slab rates,” said Swapnil Patni, a chartered accountant.

 

If an investor falls under the 30 per cent tax bracket, she would be liable to pay Rs 4,500 (30 per cent of Rs 15,000) as tax on dividends received. It’s important for investors to factor in this tax implication while planning their investments and returns.

 

Additionally, a TDS (Tax Deducted at Source) of 10 per cent is applicable on dividend income exceeding Rs 5,000 in a financial year. This means if an individual receives dividends amounting to Rs 15,000, a TDS of Rs 1,000 (10 per cent of Rs 10,000, as the first Rs 5,000 is exempt) would be deducted at the source. However, this TDS can be adjusted against the total tax liability when filing ITR.

 

Dividend payments received from foreign companies are taxed once it reaches the investor. However, the investor can opt to be taxed at either a flat rate of 20 per cent, including other charges or at the tax rate of their income tax slab.

 

“Investors are not required to pay taxes on dividends earned from equity mutual funds. However, the mutual fund manager deducts a 10 per cent Dividend Distribution Tax (DDT) along with other charges. Similarly, before the dividend is paid to the investor, the DDT is deducted at a rate of 25 per cent for dividend payments from debt mutual funds,” said Sandeep Agrawal, director and founder at Teamlease Regtech.

 

“Investors should stay informed about these tax norms and ensure proper disclosure of dividend income in their ITR to avoid any penal consequences,” said Swapnil Patni, a chartered accountant.