You need to pay tax on dividend

You need to pay tax on dividend in 2023: All you need to know

You need to pay tax on dividend,

15 March deadline for advance tax payment.

Dividend payment is no longer tax-free in your hand from 1 April 2020. If you have dividend income from shares, equity or debt mutual funds, you’ll have to add this as ‘income from other sources’ to arrive at your total income and pay income tax accordingly. 

Till March 2020 dividend in your hands tax-free as the dividend paying company or mutual fund house was required to pay a dividend distribution tax (DDT). The Finance Act 2020 has withdrawn the DDT liability on firms and mutual funds and instead made the dividend income taxable in the hands of the recipients at the rate of his/her marginal income tax rate. Hence, the provision (under Section 115BBDA) for paying tax at the rate of 10% by the recipient — an individual or HUF or firm — on dividend income more than Rs 10 lakh stands irrelevant and withdrawn. 

However, the Finance Act has put an onus on the dividend paying company or mutual fund house to deduct a tax at source (TDS) at the rate of 10% if the quantum of dividend paid to a single resident individual or hindu undivided family or firm is more than Rs 5000. But, in the face of Covid-19, the rate of TDS (on dividend) has been reduced from 10% to 7.5% with effect from 14 May 2020 till 31 March 2021.

Like other taxes deducted at source, this TDS (on dividend) also gets reflected on your Form 26AS. So, if you have a dividend income, cross-check the TDS amount in Form 26AS before filing your income tax return.   

If you have borrowed money to invest in a company’s share or mutual fund from which you get a dividend, then you can also claim a maximum deduction of 20% from the dividend received towards interest payment on the borrowed fund. For example, if you have borrowed money from a bank and invested the same in a company A. The company declares a dividend  and you are entitled to Rs 8,000. The company will deduct 7.5% of Rs 8,000 or Rs 600 and you’ll get Rs 7,400 in hand. Of this Rs 7,400, you can claim a maximum deduction of Rs 1,480 towards the payment of interest on the borrowed fund.   

In case your total annual tax liability is more than Rs 10,000, you’ll have to pay the tax in advance in four installments as pre-scheduled by the income tax department. Those dates are 15 June, 15 September, 15 December and 15 March. 

The problem is, if you miss an advance tax payment installment or pay less tax than you are required to, then under Section 234C of the Income Tax Act you’ll have to pay a monthly interest at the rate of 1% on the tax payment shortfall till the next installment date or the end of the financial year. 

But the problem arises in estimating the amount of dividend that you may get in future. How will you know how much dividend a company may announce? In this conundrum taxpayers either end up paying more or less tax than actually required to. 

However, the Budget 2021-22 has tried to circumvent this confusion by proposing prefilled income tax return with capital gains, interest income and dividend income of the taxpayer. So, hopefully, you do not have to bother about guessing about dividend income and advance tax payment thereon from the next financial year.        

Penalty on non-payment of advance tax

Advtax payment dateTaxamountPenalinterestAmton which interest has to be paid
15June15% of advance tax@1% for three months15% of adv tax – tax actually paid till 15 June
15September45% of advance tax@1% for three months45% of adv tax – tax actually paid till September 15
15December75% of advance tax@1% for three months75% of adv tax – tax actually paid till December 15
15March100% of advance tax100% of adv. tax – tax actually paid till March 15

The way advance tax is calculated

Income from professionRs,10,00,000
Less: ExpensesRs2,00,000R8,00,000
Income from other sources
Interest on bank depositsRs50,000
Dividend incomeRs20,000
Less: Deduction u/s 80CRs1,50,000
Total Taxable incomeRs7,20,000
Add: Education cess (4%)Rs2,260
Totaltax payableRs58,760
Less: TDS paidRs28,760
Advance tax payableRs30,000

The advance tax payment schedule

15 JuneRs4,500Rs4,500
15 SeptemberRs9,000Rs13,500
15 DecemberRs9,000Rs22,500
15 MarchRs7,500Rs30,000

If you have a question, share it in the comments below or DM us or call us – +91 9051052222. We’ll be happy to answer it. 

Parichoy Gupta

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