You may receive a dividend from your equity or mutual fund investments. The dividends received were tax-exempt until 31 March 2020 (FY 2019-20). The exemption was because the company or mutual fund paying the dividend was required to pay a dividend distribution tax. Budget 2020 changes the method of taxation by imposing the liability to pay tax on the shareholders instead of the company.
The dividends distributed by companies and mutual funds on or after 1 April 2020 are taxable income of the investor. A deduction is allowed for interest expense incurred against the dividend. The deduction should not exceed 20% of the dividend income received. However, you cannot claim a deduction for any other expenditure incurred for earning the dividend income.
The Budget 2020 also imposes a TDS on dividend income distribution by companies or mutual funds. A TDS of 10% applies to the dividend income distribution per investor. However, no TDS is applicable if the dividend receipt from a company or mutual fund does not exceed Rs 5,000 annually. For the FY 2020-21, the rate of TDS stands reduced to 7.5% for dividends paid till 31 March 2021.
For example, Mr A holds 100 shares of XYZ company. He is entitled to receive Rs 4,500 as a dividend from the company on 15 June 2020. The dividend income is less than Rs 5,000 and hence not liable to TDS. Similarly, Mr A also holds 200 units of a mutual fund and is entitled to receive Rs 6,000 as a dividend. The mutual fund is required to deduct tax at 10% of the dividend income, which is Rs 450. In both cases, the dividend income is taxable as the annual income of Mr A as per the slab rates.
Taxpayers whose gross annual income is below the basic exemption limit of Rs 2,50,000 and senior citizens whose tax payable is nil can claim dividend income without TDS. Senior citizens should submit Form 15H to the company or mutual fund declaring the dividend. Other taxpayers who are below 60 years of age should submit Form 15G to claim exemption from TDS.
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I am a Chartered Accountant by profession. I specialise in personal taxes and corporate income tax matters. I am an avid reader and track developments in financial markets, economy and other market developments.