A dividend is a distribution of a company’s earnings to its shareholders that is established by the board of directors of the company. Dividends are typically paid out quarterly and might be either in cash or in the form of more stock reinvestment.
The dividend yield is represented as dividend/price as a percentage of a company’s share price, for example, 2.5 percent.
Key Points:
- A dividend is the distribution of a company’s profits to its eligible shareholders.
- The board of directors of a firm decides on dividend payments and amount.
- The dividend yield is the dividend per share expressed as a percentage of the share price of a corporation.
- Many businesses do not issue dividends and instead keep earnings to reinvest in the business.
Taxation On Dividend
Many people earn money from sources other than their job or self-employment. Dividends are one such typical source of income. Dividend income, like most other sources of income, is taxable. With the implementation of the Finance Act 2020, the laws on tax on dividend income underwent a significant modification, shifting the burden of tax on dividend from the dividend declaring firm to the individual receiving the dividend.
dividend income is taxable in India, and the conditions for dividend taxability are outlined in the Finance Act 2020. The Finance Act 2020 is significant in answering the question ‘is dividend income taxable?’ because it changed the way dividend income is taxed. The dividend distribution tax was repealed, and the tax liability was transferred from the dividend giving corporation to the investor.
1. Dividend Distribution Tax:
Old vs. New Dividend Distribution Tax Provisions The taxability of dividend income has changed in a number of ways: – Dividends received by shareholders from an Indian firm were exempt until March 31, 2020 (FY 2019-20), because the dividend paying corporation used to pay the dividend distribution tax (DDT) before disbursing payment to the shareholders. – The provisions for taxing dividends changed on April 1, 2020 (FY 2019-20). Investors/shareholders are now responsible for paying taxes on any dividends received. – Companies and mutual funds are no longer responsible for DDT. Similarly, the 10% tax on dividend receipts of resident people, Hindu Undivided Families (HUF), and corporations over Rs 10 lakh (as defined in section 115BBDA) was repealed.
2. TDS on Dividend Income Besides changing the taxation method
Dividend Income TDS The Finance Act 2020, in addition to modifying the taxation method, includes a few additional clauses regarding the taxability of dividend income. – According to the act, a TDS is levied on dividends paid by corporations and mutual funds on or after April 1, 2020. – TDS is generally 10% on dividends of Rs 5,000 or more paid by corporations and mutual funds. To alleviate investor concerns, the TDS rate was cut through 7.5 percent for dividend distributions from May 14, 2020, to March 31, 2021. – The dividend tax free limit or threshold of Rs 5,000 does not apply if the shareholder is a HUF, firm, company, trust, or other similar entity. TDS will be applied to the total dividend amount. Furthermore, the Rs 5,000 threshold is applied only if the individual shareholder furnishes a PAN; otherwise, the TDS rate is 20%. – TDS deducted by resident Indians will be available as a credit against the taxpayer’s overall tax due while submitting ITR.
For example, on August 20, 2021, Mr. Ashok received a dividend of Rs 8,000 from an Indian company. Mr Ashok will receive Rs 8,000 – TDS (Rs 600) = Rs 7,400 from the company that is providing the dividend. Mr Ashok will be able to claim Rs 600 as TDS credit on filing his ITR. The received amount of Rs 7,400 is taxable according to the tax slab rates for the fiscal year. – The TDS rate for non-resident Indians is 20% and is subject to any applicable Double Taxation Avoidance Agreement (DTAA). Because of any favourable treaty with the nation of residency, the NRI can take advantage of lower tax deduction benefits. To do so, he or she must provide documentary proof such as Form 10F, beneficial ownership declaration, tax residency certificate, and so on. Otherwise, a greater TDS would be taken from the dividend, which the shareholder might claim on completing the ITR. – There is also a surcharge (applied at different slab rates) and a health and education cess of 4% on dividend income received by NRIs.
3. Dividend Received From Foreign Company:
Any dividend received from a foreign corporation is taxable under the category of ‘income from other sources.’ – The whole dividend amount received from a foreign corporation will be counted as part of the taxpayer’s total income and will be taxed according to the applicable tax slab. – Dividends received from a foreign corporation are also eligible for interest expense deduction up to a maximum of 20% of gross dividend income. Proper understanding of dividend income and the tax requirements that accompany it enables you to pay your taxes and receive the maximum benefits. It is critical to understand all of the rules governing dividend income taxation so that you may better manage your investments and spending.
Top Dividend Paying Companies In India (as on July’2022)
| Name | Market Cap (Rs, Cr) | PE Ratio | Dividend Yield (%) | Sector |
| Vedanta Ltd | 85,463 | 4.55 | 19.51 | Metals – Diversified |
| Indian Oil Corporation Ltd | 97,013 | 3.86 | 11.92 | Oil & Gas – Refining & Marketing |
| Power Grid Corporation of India | 1,45,264 | 8.63 | 11.88 | Power Transmission & Distribution |
| Coal India Ltd | 1,08,988 | 6.28 | 9.61 | Mining – Coal |
| Oil and Natural Gas Corporation | 1,69,079 | 3.71 | 7.81 | Oil & Gas – Exploration & Production |
| Hindustan Zinc Ltd | 1,08,886 | 11.31 | 6.98 | Mining – Diversified |
| Tata Steel Ltd | 1,05,208 | 2.62 | 5.92 | Iron & Steel |
| Bharat Petroleum Corporation Ltd | 63,042 | 5.40 | 5.31 | Oil & Gas – Refining & Marketing |
| Indus Towers Ltd | 56,420 | 8.85 | 5.25 | Telecom Infrastructure |
| NTPC Ltd | 1,33,087 | 7.98 | 5.10 | Power Generation |
Why do Companies Don’t Pay Dividend?
1. Re-investing the Profits:
- Many a times, only moderate retained earnings are available with the company. In such case, planning to increase the company’s retained earnings becomes the foremost priority. Why retained earnings are so much important?
- Here, Retained Earnings are Re-invested in the Business Expansion instead of Paying Dividends. This is what companies with a high growth prospects do.
- Rather than paying dividends to shareholders, the management believes they can deliver better value to shareholders through capital appreciation by reinvesting the profits back into business for new products, new ideas.
2. Strategic Acquisitions for Business Expansion:
- The second motivation for firms deferring dividend payments and hoarding cash is for acquisitions. This occurs when one corporation buys another and merges them into a single entity.
- Another regular occurrence is when one firm buys an interest in another company.
- Warren Buffett is well-known for his ability to make acquisitions. Mr. Buffett is opposed to paying dividends, claiming that money can be better spent elsewhere. He believes, and has demonstrated, that reinvestment and acquisitions may help a company deliver more value to its owners.
3. Despite a large number of receivables, cash flow is limited:
- Many times, accounting entries of expected earnings are made, but the free cash flow is not realised due to a huge number of receivables.
- In such a circumstance, the company has a limited cash flow, which prevents it from paying dividends to its shareholders despite the company’s ability to forecast future profits.
Also Read: Top 20 Finance Terms Everyone should know!