Physics Wallah

What are Tax and Dividend? Treatment, And More

Understand the treatment of tax and dividend in India, including DDT changes, income tax on dividends, TDS rates, deductions, and double taxation relief for effective financial planning.
authorImageMuskan Verma7 Jan, 2025
Share

Share

Tax and Dividend

The treatment of tax and dividend is a crucial aspect of personal and corporate financial management. It involves understanding the tax implications of dividends received by shareholders and paid by corporations. This blog explores the concepts of tax and dividend, their treatment under Indian law, and their impact on individuals and businesses.

What Are Tax and Dividend?

The financial charge imposed by the government on various forms of income, goods, or services. Taxes fund public services and infrastructure development and are broadly categorized into direct and indirect taxes. Dividend : A portion of a company's earnings distributed to its shareholders as a reward for their investment. Dividends are issued in cash or stock, reflecting a company's profitability.

What is Dividend Distribution Tax (DDT)?

Previously, companies distributing dividends were liable to pay a Dividend Distribution Tax. This tax was calculated based on the total dividend distributed and was paid by the company before disbursing the profits to shareholders.

Obligation to Pay DDT

As per the Income Tax Act, companies were required to pay DDT within 14 days of:
  1. Payment of dividends.
  2. Declaration of distributions.
  3. Actual dividend payment.
Failure to meet this deadline resulted in a penalty, where a 1% interest per month (or part thereof) was levied on the outstanding amount, calculated from the due date until payment.

Finance Act, 2020 – A Shift in Taxation

The Finance Act, 2020, abolished DDT, aligning India's tax system with international practices. Under the revised system: Dividends are taxed in the hands of the shareholders. Tax rates are based on the individual’s income tax slab.

Is Dividend Taxable?

Dividends are considered income and are subject to tax. However, the treatment depends on whether the individual is an investor or a trader in securities:

Traders :

  • Dividends earned through trading are treated as "business income."
  • All necessary expenses incurred in earning this income, such as interest on loans or collection fees, can be deducted.

Investors :

  • Dividends earned through investments are taxed under "income from other sources."
  • Deductions are limited to interest expenses up to 20% of the dividend income.
  • Fees paid to bankers or agents for realizing dividends are not deductible.

Income Tax on Dividend Income

Income tax on dividend income is the tax levied on the earnings distributed by a company to its shareholders. The tax rate depends on the source of the dividend:

Domestic Companies :

  • Dividends from Indian companies are taxable in the hands of the shareholders as per their income tax slabs.
  • Companies deduct TDS at 10% if the total dividend exceeds ₹5,000 in a financial year.

Foreign Companies :

  • Dividends from foreign companies are considered part of "income from other sources."
  • These are taxed at the applicable slab rates, but double taxation relief can be availed under Section 91 or applicable DTAA provisions.

Deduction Rules for Dividend Income

For Business Income : If dividends are treated as business income, all expenses necessary to earn that income, including interest on loans, collection fees, or other relevant costs, are deductible. For Income from Other Sources : Only interest expenses up to 20% of the total dividend income are deductible.

TDS on Dividend Income

For Resident Shareholders : TDS is deducted at 10% if dividends exceed ₹5,000. For Non-Residents : TDS is deducted at 20%, subject to applicable tax treaty benefits under DTAA.

Double Taxation Relief

Double taxation occurs when the same income is taxed in two different jurisdictions. In India, relief from double taxation on dividend income can be claimed under: Tax Treaties (DTAA) : India has treaties with several countries to avoid double taxation, allowing taxpayers to claim credit for taxes paid abroad. Section 91 : In the absence of a treaty, unilateral relief can be claimed under Section 91 of the Income Tax Act.

Practical Implications of Tax and Dividend

Below we've mentioned practical implications of treatment of tax and dividends:

Advance Tax Payments

Taxpayers receiving substantial dividend income must pay advance tax to avoid penalties.

Record Maintenance

Proper documentation, including dividend receipts and TDS certificates, ensures smooth tax compliance.

Strategic Planning

Investors should strategically choose dividend-yielding instruments while considering their tax implications. The treatment of tax and dividends is integral to financial planning for individuals and corporations. The transition from Dividend Distribution Tax to taxing dividends in the hands of shareholders has made taxation more transparent but also increased compliance responsibilities for taxpayers. Understanding the tax and dividend treatment, available deductions, and double taxation relief can help optimize financial returns and ensure adherence to tax laws. Join PW Commerce Online Course now and excel in your academic and professional pursuits!
Commerce Related Topics
Social Responsibility of Business and Ethics Functions of the central bank
What are Normal and Inferior Goods What is Written Communication
What is Price Elasticity of Demand Workers and Employment in India

What are Tax and Dividend FAQs

Are dividends received from Indian companies taxable?

Yes, dividends received from Indian companies are taxable in the hands of shareholders as per their applicable income tax slab rates. Additionally, companies deduct TDS at 10% if the total dividend exceeds ₹5,000 in a financial year.

What is the difference between Dividend Distribution Tax (DDT) and the current taxation system for dividends?

Under the earlier system, Dividend Distribution Tax (DDT) was paid by the company before distributing dividends to shareholders. However, with the Finance Act, 2020, DDT was abolished, and dividends are now taxed directly in the hands of shareholders.

Can I claim any deductions on dividend income?

Yes, deductions are allowed for interest expenses incurred to earn dividend income: For business income: All relevant expenses, including interest on loans and collection charges, can be deducted. For income from other sources: Interest expenses up to 20% of the total dividend income can be claimed as a deduction.

Are dividends received from foreign companies taxable in India?

Yes, dividends received from foreign companies are taxable under "income from other sources" and are taxed at the individual’s applicable income tax rate. Relief from double taxation can be claimed under DTAA or Section 91 of the Income Tax Act.

Is TDS applicable on dividend income, and at what rate?

Yes, TDS is applicable on dividend income: For residents: TDS is deducted at 10% if the dividend exceeds ₹5,000. For non-residents: TDS is deducted at 20%, subject to tax treaty benefits under DTAA.
Popup Close ImagePopup Open Image
Talk to a counsellorHave doubts? Our support team will be happy to assist you!
Popup Image
CTA Image
07290070560
Join 15 Million students on the app today!
Point IconLive & recorded classes available at ease
Point IconDashboard for progress tracking
Point IconMillions of practice questions at your fingertips
Download ButtonDownload Button
Banner Image
Banner Image
Free Learning Resources
Know about Physics Wallah
Physics Wallah is an Indian edtech platform that provides accessible & comprehensive learning experiences to students from Class 6th to postgraduate level. We also provide extensive NCERT solutions, sample paper, NEET, JEE Mains, BITSAT previous year papers & more such resources to students. Physics Wallah also caters to over 3.5 million registered students and over 78 lakh+ Youtube subscribers with 4.8 rating on its app.
We Stand Out because
We provide students with intensive courses with India’s qualified & experienced faculties & mentors. PW strives to make the learning experience comprehensive and accessible for students of all sections of society. We believe in empowering every single student who couldn't dream of a good career in engineering and medical field earlier.
Our Key Focus Areas
Physics Wallah's main focus is to make the learning experience as economical as possible for all students. With our affordable courses like Lakshya, Udaan and Arjuna and many others, we have been able to provide a platform for lakhs of aspirants. From providing Chemistry, Maths, Physics formula to giving e-books of eminent authors like RD Sharma, RS Aggarwal and Lakhmir Singh, PW focuses on every single student's need for preparation.
What Makes Us Different
Physics Wallah strives to develop a comprehensive pedagogical structure for students, where they get a state-of-the-art learning experience with study material and resources. Apart from catering students preparing for JEE Mains and NEET, PW also provides study material for each state board like Uttar Pradesh, Bihar, and others
Privacy Policy
Terms of use
Copyright © 2025 Physicswallah Limited All rights reserved.
Get App