Tax on Dividends Received from Mutual Fund/Indian Company

An individual is not liable to pay tax on the dividend received from mutual fund if the amount is below Rs.10 lakh. But if the amount exceeds this limit the investor has to pay 10% of the total earnings as tax during a particular year.

There is always an air of confusion when we talk about the topic of tax of dividends received by an individual on their investments in company shares or mutual funds. The most common question in this regard is if the recipient is liable to pay taxes on the dividends received from the listed company.

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The answer is “No”. The dividend distributed by a listed company or a mutual fund house is non-taxable from the taxpayer’s point of view. In the National Budget 2016, an amendment was made to the existing laws where the dividend received by an individual or HUF of up to Rs.10 lacs is non taxable. If the amount exceeds this limit, the taxpayer is liable to pay taxes and other levies at 10% of the total earnings during a specific assessment year.

The section below details the logic behind non-taxation of this type of income and throws further light on the nitty gritties surrounding it.

Section 10 (34) & 10 (35) - Income Tax Act:

The section 10 (34) specifically deals with dividends received by investors on their holdings from Indian companies, making them tax free under the Income Tax Act. In addition, section 10 (35) talks about income received from investment in mutual funds also being exempt from taxes. Therefore, income earned under both these sections do not require payment of taxes on them. It must be noted that tax on dividends was taxable earlier.

On the flipside, the government has made it mandatory for companies and mutual fund houses to deduct taxes from the dividends distributed before disbursing them. The section below deals with the description and the manner in which the tax is computed at the source before payment.

Section 115-O - Dividend Distribution Tax:

During payment of dividend to investors, the company is required to pay Dividend Distribution Tax on the profits made during a specific period. To compensate the non-levy of taxes on the dividends earned for the end investor, the government has mandated the levy of DDT. The company is required to distribute the balance dividend to the investor after deducting this tax at prevailing rate.

It must be noted that this tax is only payable on dividend declared by Indian companies. Foreign companies paying dividends should be treated as a normal transaction where taxes are levied as per the latest tax slabs. The Dividend Distribution Tax rate is provided below.

  • Domestic Company - 15 percent + 10 percent Surcharge + 3 percent Cess
  • Mutual Funds - 25 percent + 10 percent Surcharge + 3 percent Cess
  • Equity Mutual Funds - Nil 

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