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People today may think of DDT as the insecticide used by farmers, but not long ago, it was an important term in income tax parlance. Dividend Distribution Tax (DDT) was paid by domestic companies that distributed dividends among their shareholders. If you were a shareholder receiving such dividend income, you were not required to pay any income tax on the same. But this changed with the Finance Act 2020.
Finance Act 2020 abolished DDT and put the tax liability on the recipient, thereby introducing TDS on dividends. TDS on dividend income is defined in section 194 of the Income Tax Act.
Let's take a closer look at TDS on dividend income.
Section 194 requires Indian companies to deduct a TDS of 10% from the dividend distributed. This is applicable to all dividends declared, paid or distributed on or after 1 April 2020. This is applicable to dividend amounts distributed to resident shareholders as and when the aggregate amount of dividend paid or distributed to the shareholder by a company or mutual fund is more than ₹5,000 during the financial year.
The dividend paid to LIC, GIC or other insurer is not subject to TDS deduction. Dividends paid to non-residents and foreign companies are subject to tax deduction under section 195 and as per the Double Taxation Avoidance Agreement (DTAA) in place.
TDS on dividends is applicable when total dividend income during the financial year exceeds ₹5,000. TDS is deducted on dividend income at 10%, but if PAN is not provided to the paying institution, the TDS rate goes up to 20%.
As we know, the tax exemption limit under the Income Tax Act begins from Rs 2.5 lakhs. Therefore, it is possible that your dividend income during the year may exceed ₹5,000, but taxable income may not exceed Rs 2.5 lakhs. In such a case, tax is first deducted and then refunded. To avoid this, taxpayers can submit Form 15G or Form 15H.
Form 15G and 15H are self-declaration forms that you submit to ensure that your income is not subjected to TDS. Individuals can submit this form to the bank, and based on this submission, the bank will not deduct TDS in their case.
While submitting either of the forms, you must ensure that the tax calculated on your total income is nil.
If you are certain about your nil tax liability, you should use these forms to avoid TDS on dividends for FY 2025-26. This will spare you from filing returns and claiming tax refunds. If you want to maximise your dividend income from equity and mutual funds, you must explore IDFC FIRST Bank Mutual Funds for a customised investing solution.
The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirstbank.com for latest updates.