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Tax on dividend income received by individual/HUF/firms

Dividend income received by individuals is taxed based on the source of dividend income i.e. the type of entity declaring the dividend income

Tax on Dividend Income : Budget 2018-19 Highlights
  • Dividend Distribution tax of 10% on distributed income by equity-oriented mutual funds has been introduced
Source of Dividend Income Tax Rate for Individuals/HUFs Income Tax Section
Domestic Company
-if aggregate dividend income received during the year is less than Rs. 10 lakh Nil Section 10(34)
-if aggregate dividend income received during the year is more than Rs. 10 lakh 10% Section 115BBDA
Foreign Company As per the marginal tax rate applicable to the tax payer Section 115BBD
Debt Mutual Fund Nil Section 10(35)
Equity Mutual Fund Nil Section 10(35)

Dividend income received from a domestic company

As per section 10(34) of Income Tax Act, any income received by an individual/HUF as dividend from an Indian company is exempt from tax as the company declaring such dividend has already deducted dividend distribution tax before paying the dividend.

However, under Section 115BBDA (as introduced in the Finance Act, 2016), if aggregate dividend received by an individual/HUF from companies exceeds Rs. 10,00,000, it is liable to pay tax at the rate of 10% on dividend income received in excess of Rs. 10 lakh. Section 115BBDA applies only on dividend income received from domestic companies under Section 10(34) and excludes dividend income received from mutual funds under Section 10(35).

Illustration 1: Tax at the rate of 10% on dividend income received by Indian company under section 15BBDA

Mr. Mehta received Rs. 15 lakh as dividend from various Indian companies during the FY17-18. Since, his dividend income for the year exceeds Rs. 10 lakh; he is liable to pay tax at the rate of 10% on excess dividend income earned over Rs. 10 lakh. In this case, he is liable to pay a tax of 10 % on Rs. 5 lakh (dividend income in excess of Rs. 10 lakh), which translates into a tax liability of Rs. 50,000.

Dividend income received from a foreign company

As per Section 115BBD of Income Tax Act, dividend received by an individual/HUF from a foreign company is fully taxable under the head “Income from other sources”. The dividend received is included in the total income of the recipient taxpayer and will be charged according to the income tax rate slabs applicable to the taxpayer.

Dividend income received from debt and equity mutual funds

As per section 10(35) of Income Tax Act, any income received by an individual/HUF as dividend from a debt mutual fund scheme or an equity mutual fund scheme is fully exempt from tax. In addition to tax in the hand of investors, dividends declared by domestic companies also attract a Dividend Distribution Tax (DDT). DDT varies by the type of entity declaring the dividend.

Type of entity declaring dividend Dividend distribution tax rate for Individuals/HUFs Relevant section of Income Tax Act
Domestic companies 17.304% (including 12% surcharge and 3% education cess) Section 115-O
Equity mutual funds 10% Section 115-R
Debt mutual funds (including liquid mutual funds) At the rate of 28.84% (including surcharge and cess) Section 115-R
Foreign companies Nil

Dividend Distribution Tax to be paid by the company

Dividend distributed by a domestic company

As per section 115-O, domestic companies declaring dividends are liable to pay dividend distribution tax before crediting the dividend in the account of its shareholders. The rate of dividend distribution tax varies by type of entity declaring the dividend. A domestic company has to pay the dividend distribution tax of 15 % plus a 12% surcharge and 3% education cess which translates into an effective tax rate of 17.304%.

Illustration 2: A company declared a dividend of Rs. 200 to its shareholders. The company is liable to pay a dividend distribution tax of 17.304%, which translates into a tax liability of Rs. 35. The company will have to deduct this tax before crediting the dividend to the account of its shareholders which in this case will be an amount of Rs. 165.

Dividend distributed by a foreign company

A foreign company is exempted from paying dividend distribution tax on dividend paid to its shareholders.

Dividend distributed by debt mutual funds

Dividend or income distributed on debt mutual funds is subject to a dividend distribution tax at the rate of 28.33% (including surcharge and cess) for Individuals and HUF investors. DDT is deducted from dividend before the mutual fund credits dividend in the account of debt mutual fund holders.

Dividend distributed by equity mutual funds

Dividend or income distributed on equity mutual funds is taxed at 10% as per the latest budget 2018-19.

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