When receiving a specific payment, such as a dividend, Tax Deducted at Source (TDS) is subtracted from the total amount received. Corporations declare cash dividends for their eligible shareholders from their profits or reserves. Dividends on equity shares, however, are subject to TDS under Section 194 of the Income Tax Act. Beginning on April 1, 2020, or FY 2020–21, Section 194 of the Income Tax Act came into effect. Hence, for the FY 2023-24 & AY 2024-25, let's know from our experts, how taxpayers can lower TDS on their dividend income.
Suresh Surana, Founder, RSM India
For Resident Taxpayers
The Finance Act 2020 abolished the concept of Dividend Distribution Tax (‘DDT’) and also withdrew the exemption u/s 10(34) of the Income Tax Act, 1961 (‘IT Act’) resulting into taxability of dividends in the hands of the ultimate shareholders. Accordingly, Section 194 of the IT Act provided that the companies declaring dividends are under an obligation to withhold tax @10% before making any dividend payment to it’s resident shareholders.
However, the company is under no obligation to deduct tax at source, if the aggregate amount of dividend distributed/likely to be distributed in a particular financial year does not exceed Rs. 5,000 and the dividend is paid by any mode other than cash.
Further, in accordance with the provisions of section 194K, TDS @10% is to be deducted by a person, before paying income in respect of units of mutual funds or other specified companies to a resident investor. Akin to section 194, TDS is not to be deducted if the aggregate quantum of income paid/likely to be paid in a particular financial year does not exceed Rs. 5,000 or if the income is in the nature of capital gains.
Individuals whose total income exceeds the Basic Exemption Limit (BEL) are required to file their Income Tax Return (ITR) in accordance with the provisions of section 139 of the IT Act. Thus, an individual who derives dividend income in excess of Rs. 5,000 in a particular FY and whose total income does not cross the BEL, would be required to file an income tax return only for the purpose of claiming the refund of TDS on dividend.
Thus, resident individuals whose estimated total annual income (including income from dividends) is below the BEL, can submit Form 15G to the company or mutual fund paying the dividend. In the same scenario, resident senior citizens can apply in Form 15H for requesting no deduction of TDS.
Apart from these, both these forms can be filed by the resident individuals in case their total tax liability is nil after taking the dividend income into consideration. In such case, though the taxpayer would be required to furnish his tax return (provided their total income exceeds the BEL), they can avoid TDS on such dividend.
These forms are valid for a financial year and must be submitted afresh for every FY in which the individual intends to avail the benefit of no deduction. It is recommendable that the taxpayers submit such forms at the beginning of every FY in order to avoid deduction of TDS.
For Non-Resident (NR) Taxpayers
As per section 195 read with section 115A of the IT Act, companies declaring dividends must withhold tax @20% (plus applicable surcharge and cess) before remitting dividend to Non-Resident shareholders. Further, section 90(2) of the IT Act provides every taxpayer can choose between the beneficial rate of TDS as per income tax provisions or relevant DTAA.
However, in order to claim the benefit of DTAA, the NRs may obtain the necessary documents such as Tax residency certificate, Form 10F, etc. All these documents should be submitted by the non-resident taxpayer to the company/ mutual fund at the time/ before such dividend payment is made, for availing of the beneficial withholding tax rate.
Gautam Kalia, SVP and Head Super Investor at Sharekhan by BNP Paribas
All the dividend income received are taxable and the TDS rate of 10% is charged if the dividend income paid is in excess of Rs.5000. If the investor’s annual income is below the exemption limit then he can submit the form 15G/15H for not deduction of TDS. Investors who want regular income may consider SWP facility instead of dividend income from mutual fund schemes to avoid TDS. The SWP facility is withdrawal from scheme and all the withdrawal includes principal and capital gains. Investors need to pay tax on capital gain only as per the short term or long term gain tax.
Ruchika Bhagat, MD Neeraj Bhagat & Company
Submit Form 15G/15H: If you are eligible for a lower tax deduction or no tax deduction at all, you can submit Form 15G/15H to the company or mutual fund house where you hold the dividend-paying stocks or mutual funds. These forms declare that your total income for the year is below the taxable limit or that your tax liability is nil.
Invest in growth option: Instead of investing in dividend-paying stocks or mutual funds, you can opt for the growth option. Under the growth option, the profits made by the company or mutual fund are reinvested in the business, and no dividend is paid out. Therefore, no TDS is applicable on such investments.
Check the tax treaty with other countries: If you are an NRI (Non-Resident Indian) and are eligible for a tax exemption under the tax treaty between India and your country of residence, you can submit the necessary documents to avoid TDS on dividend income.
Plan your investments: If your dividend income is likely to exceed the taxable limit, you can plan your investments in such a way that your total income remains below the taxable limit. This can be done by investing in tax-saving instruments or by timing your investments to avoid a high income in any particular financial year.
Claim refund: If TDS has been deducted, and you are not liable to pay tax, you can claim a refund while filing your income tax return.
Mushraff Hussain, COO of Ezeepay
You can effectively avoid or minimize TDS on your dividend income and benefit fully from your investment returns. Let me walk you through :
1. If your total dividend income is less than Rs. 5,000 in a financial year, then TDS will not apply to your interest income received.
2. You can submit Form 15G/15H to the company or mutual fund declaring that your total income for the financial year is below the taxable limit. Thus, TDS should not apply to your dividend income.
3. If you have invested in a tax-free bond, you have no TDS. will apply to the interest income received.
4. You can invest in growth mutual funds instead of dividend mutual funds to avoid TDS.
5. If you fall under a lower tax bracket, then you can declare your dividend income in your tax return and claim a refund for the TDS deducted.
Yashoraj Tyagi, CTO &; CBO, CASHe
To avoid TDS (Tax Deducted at Source) on dividend income, you can follow these steps:
1. Submit Form 15G/15H: If your total income for the financial year is below the taxable limit, you can submit Form 15G (for individuals) or Form 15H (for senior citizens) to the company or mutual fund house from which you are receiving the dividend income. This form declares that your income for the financial year is below the taxable limit, and therefore, TDS should not be deducted from your dividend income.
2. Invest in tax-free dividend income funds: You can invest in mutual funds that offer tax-free dividend income. Some mutual funds invest in stocks that generate tax-free dividends, and the income received from such funds is exempt from tax.
3. Opt for growth option: Instead of receiving dividends, you can opt for the growth option in mutual funds. In this option, the dividends are reinvested in the fund, which increases the NAV (Net Asset Value) of the mutual fund. The gains made on the investment are taxed only at the time of redemption, and there is no TDS on the dividend income.
4. Plan your investments to optimize tax benefits: You can plan your investments to optimize the tax benefits. For example, you can invest in tax-saving mutual funds, PPF, or NPS to reduce your taxable income and avoid TDS on dividend income.
It is important to note that even if TDS is deducted on your dividend income, you can claim a refund by filing your income tax return. Therefore, it is advisable to declare your dividend income in your income tax return and claim the refund if applicable.
Prateek Toshniwal, Co-Founder of IVY Growth Associates, MI Capital (UAE)
Smart investing isn't just about making profits, it's also about minimizing your tax liabilities. If you're earning dividend income, it's crucial to take steps to avoid TDS. Firstly, ensure that your total dividend income from all sources is below the taxable limit of Rs. 5,000. If it exceeds this limit, consider investing in tax-saving instruments such as ELSS, PPF or NPS to reduce your taxable income.
Additionally, you can opt for the growth option instead of the dividend option while investing in mutual funds, as this will defer the tax liability until you redeem your investment. Another way to avoid TDS on dividend income is by investing in stocks that offer lower dividend yields, as these are taxed at a lower rate. Remember, being tax-savvy is as important as being investment-savvy, and taking the right steps can go a long way in maximizing your returns.
S Ravi, Former Chairman of Bombay Stock Exchange (BSE)
Tax Deducted at Source (TDS) is a tax collected by the government from the income earned by an individual or a company. In the case of dividend income, TDS is deducted by the company paying the dividend. However, there are ways to avoid TDS on dividend income:
1. Submit Form 15G/15H: Individuals whose total income is below the taxable limit can submit Form 15G/15H to the company paying the dividend. This will ensure that no TDS is deducted from the dividend income.
2. Opt for the new tax regime: Under the new tax regime, dividend income is taxed at the individual's applicable income tax rate, and no TDS is deducted.
3. Invest in tax-free dividend income funds: Investing in tax-free dividend income funds can help individuals avoid TDS on dividend income. These funds invest in companies that do not pay dividend distribution tax (DDT) and, therefore, no TDS is deducted.
4. Submit PAN card details: Individuals can avoid TDS on dividend income by submitting their PAN card details to the company paying the dividend. This will ensure that TDS is deducted at a lower rate or not at all, depending on the individual's applicable income tax rate.
5. Claim a refund: Individuals who have paid TDS on dividend income can claim a refund by filing their income tax returns. This can be done by mentioning the TDS amount in the tax return and claiming a refund of the excess tax paid.
Malhar Majumder, Partner – Positive Vibes
Effective 1st April 1, 2020, dividends are not tax-free, as per the new amendments put forth in the Finance Act, 2020. However, no tax is deducted on the dividends paid to resident individuals, if the aggregate dividend distributed or likely to be distributed during the financial year does not exceed INR. 5000. A 10% TDS is payable on the dividend income amount over INR 5,000 during the fiscal year.
If the PAN is not submitted, the TDS rate would be 20%. If an individual’s income, which includes the dividend income is less than INR 2.5 lakh, it is not taxable. If your taxable income is less than ₹2.5 lakh, but you have paid TDS on dividends, submit Form 15G or Form 15H for individuals over 60 years old to notify the company or the share registrar and transfer agent of mutual funds.
Nirav Karkera, Head of Research, Fisdom
Dividends are taxable at the hands of the investor while a TDS of 10% is applicable on dividend payouts exceeding INR 5,000 in a financial year. If an individual's total income including the dividend income is below the personal income tax exemption limit, they can submit the 15G/15H, as applicable, to avoid TDS.
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Vipul Das
Vipul Das is a Digital Business Content Producer at Livemint. He previously worked for Goodreturns.in (OneIndia News) and has over 5 years of expertise in the finance and business sector. Stocks, mutual funds, personal finance, tax, and banking are among his specialties, and he is a professional in industry research and business reporting. He received his bachelor's degree from Dr. CV Raman University and also have completed Diploma in Journalism and Mass Communication (DJMC).
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Published: 11 Mar 2023, 08:43 PM IST