Pay Income Tax on Dividend Received on Shares and Mutual Fund from 1 April 2020 know how to avoid TDS

Pay Income Tax on Dividend Received on Shares and Mutual Fund from 1 April 2020 at the slab rates applicable

The Finance Act 2020 has reintroduce the old system to tax dividend in the hands of shareholders and has removed Dividend Distribution Tax on Companies and exemption under section 10(34). The Finance Act has says the exemption under section 10(34) i.e Dividend Income will not be available in respect of Dividend received on or after 01 April 2020. The Tax has to paid at the slab rates applicable. Individuals has option to submit Form 15G and Form 15H to avoid Tax Deduction at Source

Following are FAQ on Taxation of Dividend in case of Shares and Mutual Fund

1) What is the tax treatment of dividend received from Mutual Funds and Share for FY 2019-20?

The Dividend received is exempt in hands of Individuals and others. However, the Company and Mutual Fund declaring dividend is required to pay dividend distribution tax (‘DDT’) on the amount of dividend

2) What is the tax treatment of dividend received from Mutual Funds and Share form FY 2020-21 AY- 2021-22?

The Finance Act, 2020 has removed the levy of DDT in the hands of the Company or Mutual Fund and adopted the classical system of dividend taxation under which the Company and Mutual Funds would not be required to pay DDT. The dividend shall be taxed only in the hands of the Shareholders or unit holders.

However, the Company and Mutual Funds shall be required to deduct tax at source (‘TDS’) on the dividend income at prescribed rates for all unitholders i.e. resident/non-resident/FII/FPI.

3) What is the date of applicability of the new tax regime?

The new tax regime shall be applicable w.e.f. April 1, 2020 and will apply from FY 2020-21.

4) What type of Mutual Fund schemes are covered?

All types of Mutual Fund schemes are covered under the new tax regime, i.e. equity oriented and other than equity oriented mutual fund schemes under dividend payout and dividend reinvestment options.

5) What is the TDS rate on dividend income credited / paid to resident having PAN?

As per section 194K of the Act, TDS at the rate of 10% should be deducted on dividend income credited / paid to resident. TDS is required to be deducted at the time of credit of such income to the account of the Shareholder or unitholder or payment of any income to Shareholder or unitholder, whichever is earlier.

6) What  is  the  threshold  limit  for  applicability  of  TDS  on  dividend  credited  /  paid ?

Section 194K of the Act provides for a threshold of INR 5,000 in aggregate for the financial year. TDS provisions should not apply in case where the amount of dividend credited / paid does not exceed the threshold limit in a particular financial year.

The threshold limit is applicable for aggregate dividend credited / paid in a financial year. The same is to be computed at the PAN level.

However, on account of practical difficulties involved due to unique nature of mutual fund investments and different schemes involved, Many Mutual Fund shall deduct TDS from each dividend declared i.e. even without reaching INR 5,000 threshold.

7) How can i claim Refund my TDS deducted from Dividend Income Received for FY 2020-21?

In case of total TDS exceeding the actual tax liability of any Share Holder or Investors , he/she can claim refund while filing income-tax return.

8) What is the TDS rate on dividend income credited / paid to non-resident from FY 2020-21?

As per section 196A of the Act, TDS at the rate of 20% (plus applicable surcharge and cess) should be deducted on dividend income credited / paid to non-resident (other than FII/FPI). There is no threshold limit applicable in case of dividend income credited / paid to non-resident.

Separately, as per section 196D of the Act, TDS at the rate of 20% (plus applicable surcharge and cess) should be deducted on dividend income credited / paid to FII/FPI. There is no threshold limit applicable in case of dividend income credited / paid to FII/FPI.

9) What is the TDS rate on dividend income in case shareholder or unitholder do not have PAN

TDS shall be deducted at the following rates in case PAN of unitholder is not available: Resident: 20% and Non-resident: 20% (plus applicable surcharge and cess)

10) What is the applicability of TDS provisions in case of dividend credited / paid to minor?

As per section 64(1A) of Act, income of minor child gets clubbed with the income of the parent for tax purposes. Accordingly, the parent should provide a declaration under section 199 of the Act read with Rule 37BA(2) of the Income-tax Rules, 1962 to the Company or Mutual Fund for TDS deduction under the PAN of the parent. In the absence of such a declaration, the Mutual Fund should deduct TDS on dividend credited / paid under the PAN of the minor.

11) Can a Shareholder or unitholder obtain a certificate from income-tax authorities for TDS deduction at a lower / nil rate?

A resident Shareholder or unitholder may make an application to the income-tax authorities under section 197 of the Act for obtaining a certificate for lower / non-deduction of TDS on dividend income credited / paid by Mutual Fund.

12) Can a Shareholder or unitholder being a Senior Citizen submit Form No. 15H for no TDS deduction?

A resident individual (aged 60 years or more) can submit Form No. 15H to Company or Mutual Fund for non- deduction of TDS under section 194K of the Act provided that the tax on his estimated total income (including such dividend received from Mutual Fund) of the financial year is NIL.

It is recommended that the form should be submitted on an annual basis at the start of the financial year. This will ensure No TDS is deducted and in case TDS is deducted they can claim refund by filing Income Tax Returns

13) Can a Shareholder or unitholder submit Form No. 15G for no TDS deduction?

A person (not being a company or firm) can submit Form No. 15G to Company or Mutual Fund for non-deduction of TDS under section 194K of the Act provided that the tax on his estimated total income (including such dividend received from Mutual Fund) of the financial year is nil.

It is recommended that the form should be submitted on an annual basis at the start of the financial year. This will ensure No TDS is deducted and in case TDS is deducted they can claim refund by filing Income Tax Returns

14) Under which Section Company needs to deduct TDS and Who is responsible?

The provision with respect to TDS on dividend is covered under section 194 of the income tax act. As per section 194 of the income tax act the Principal officer of an Indian Company or a Company making prescribed arrangements for declaration and payment of the dividend within India is required to deduct TDS on dividend, if the following conditions are satisfied:

  1. The dividend paid to a shareholder who is resident in India; and
  2. The dividend paid is covered under clause a to e of section 2(22)

15) How much time you have to submit Form 15G and Form 15H for No deduction of TDS and What are Conditions applicable ?

Extra Time Given to Senior Citizen and Others to file Form 15G & 15H to avoid TDS for FY 2020-21 till 30 June.

16) What are exemption given for applicability of TDS?

Section 194 shall not be applicable in the following cases:

  1. Where the dividend paid to an individual in aggregate is Rs. 5,000 and such dividend is paid by account payee cheque.
  2. Dividend paid by Life insurance corporation of India in respect of shares owned by it or have a full beneficial interest.
  3. Dividend paid to the General Insurance Corporation of India in respect of shares owned by it or have a full beneficial interest.
  4. Dividend paid to any other insurer in respect of shares owned by it or have a full beneficial interest.
  5. Dividend covered by provisions of section 115-O.
  6. Declaration has been filed either in Form 15G or Form 15H.

17) How Deduction in respect of certain intercorporate dividends exempt in Section 80M?

Where a company receives dividend by virtue of shareholding in another company such dividend is known as intercorporate dividend. Such dividends are exempt from tax when they are received from a domestic company if received prior to 1st April 2020. Deduction under section 80M has been introduced to nullify the cascading effect (tax on tax effect) on the companies receiving and paying dividend.

This section is applicable in respect of dividend distributed after 1st April 2020. Section 80M allow deduction in respect of dividend income received from foreign company and Business trust. The whole amount of dividend received from foreign company and Business trust shall qualify for deduction under section 80M. However, dividend from foreign company taxable under section 115BBD will not qualify for this deduction in view of specific restriction on allowability of any deduction under this act imposed under the said section

18) How Much Income Tax an individual will be liable to pay from Financial Year 2020-21 and Assessment Year 2021-22 on dividend inome from Shares and Mutual Fund?

The Income from Dividend from Shares and Mutual Funds from 1 April 2020 will be Taxed based on Slab rates of Individual or HUF or Entity receiving it. This means if you are in 20% Tax Slab then you will have to pay 20% Tax + Cess and Surcharge as applicable. if you are income is less than Rs 5 Lakhs then you will have to pay no Tax as you will be eligible for Rebate

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