What are Dividends: Tax on Dividends in India?

Introduction

Dividends are a distribution of a part of a listed company’s earnings to its shareholders.  They are usually paid out in cash or stock and are a way for companies to share their profits with their investors. Dividends can be an important source of income for investors and can help to provide a steady stream of income over time. In general, dividends indicate financial health and stability for a company.

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Definition of Dividends

Dividends are payments made by companies to their shareholders as a way to distribute a portion of their earnings. They can be paid out in cash or stock and are usually paid on a regular basis, such as quarterly or annually.

Importance of Dividends

Dividends are important for investors as they provide a way for companies to share their profits with their shareholders. They can also be an indicator of a company’s financial health and stability. Companies that pay dividends are often seen as more reliable and trustworthy than those that do not. Additionally, dividends can help to offset losses in a company’s stock price and can provide a way for investors to earn a return on their investment even if the stock price does not appreciate significantly. You need to choose the best share broker in India to buy the stocks from so that you can save on many aspects such as brokerage fees, research tools, and customer service. Also, choose the right stocks to get the benefit of dividends.

1. Cash Dividend

In contrast to stock or any other form of dividend distribution, a cash dividend is a payment made by a company to its stockholders in the form of regular cash distributions. Cash dividends are frequently distributed on a regular schedule, such as monthly or quarterly, although they can also be paid out only once. Cash dividends can be accepted or reinvested with most of the brokers.

Cash dividends are a popular method for businesses to return money to their shareholders in the form of regular cash payments; these dividends are commonly distributed quarterly, however, some equities may distribute them monthly, annually, or semiannually.

2. Stock Dividend

A stock dividend is a distribution of additional shares of a company’s stock to owners of the common stock. The distribution is made on a proportional basis, meaning that current holders of stock receive additional shares of stock in proportion to their current holdings. A stock dividend is different from a cash dividend, which is a payment made to shareholders in cash. For instance, if a business declares a 3% stock dividend, it will issue 0.03 shares for each share that a shareholder owns.

3. Property Dividend

Property dividends are a type of dividend payment that is made in the form of assets rather than cash. These assets can include real estate, stocks, or other types of property. Property dividends are often used by companies that have many assets but may not have the cash on hand to pay out a traditional cash dividend. Property dividends can be beneficial for investors because they allow them to receive a portion of the company’s assets without having to sell their shares. However, property dividends can also be more complicated than cash dividends because they require the company to value its assets and distribute them to shareholders.

4. Scrip Dividend

Scrip dividends are also known as liability dividends. The corporation distributes certificates to its shareholders in place of cash dividends, with the option to exchange them for shares or future payouts. A company will issue scrip dividends when it is short on funds to pay dividends. A scrip dividend is proposed by the board of directors. Scrip dividends are new shares of an issuer’s stock that are issued to shareholders instead of a dividend. When an issuer doesn’t have enough cash on hand to pay a cash dividend but still wants to reward shareholders, they may use scrip dividends.

5. Special Dividend

A one-time transfer of firm assets, mostly in the form of cash, to shareholders is called a special dividend. The majority of special dividends are connected to a specific event and are larger than the regular dividends given to shareholders.

Special dividends can also be given when a company wishes to distribute excess cash to the shareholders. A special dividend is usually huge compared to normal dividends given by the company and is often tied to a specific event/occasion like an asset sale, corporate restructuring, spin-off, or another windfall-generating event.

6. Bond Dividend

Bond dividends are payments made by a corporation to its bondholders. They are similar to stock dividends, but instead of paying out in shares of stock, bond dividends pay out in cash. Bond dividends are usually paid out on a regular basis, such as monthly or quarterly. The amount of the dividend is usually expressed as a percentage of the bond’s face value. The dividend rate is set when the bond is issued and remains fixed throughout the life of the bond.

7. Liquidation Dividend

A corporation may pay its shareholders a liquidating dividend as part of a partial or complete liquidation. It is also known as a terminal dividend or a liquidation dividend, as it involves the distribution of semi-liquid and liquid assets among the shareholders of the company. When a corporation ceases operations and distributes to shareholders its net assets (after all liabilities have been settled) or when it sells a piece of its business for cash and distributes the proceeds to shareholders, the transaction is referred to as a liquidation dividend.

 

Tax on Dividends

Dividends are an important source of income for many investors, and understanding how they are taxed can help investors make more informed investment decisions.

Dividends are a tax-efficient way of obtaining income because qualified dividends are taxed at lower rates than ordinary income.  The amount, procedure, nature, and frequency of dividend payouts are all outlined in the dividend policy, which is crucial. This holds true regardless of whether the dividend policy is expressly stated or understood informally. Sending signals to present investors and attracting new ones are two goals of the dividend policy.

Types of Taxes on Dividends

The Indian government has implemented two types of taxes on dividends: Dividend Distribution Tax (DDT) and Tax Deducted at Source (TDS) on dividend income. The taxability of dividend income was transferred from the dividend-declaring corporation to individual investors by the Finance Act 2020. It simply means that there is no more DDT but only TDS.

Tax for NRIs and Residents of India

The tax rate for TDS on dividends for both NRI and residents is 20% (including cess and surcharge). If rates mentioned in DTAA are more beneficial, they should be applied.

For resident shareholders, Section 194 of the Income Tax Act, 1961 (I-T Act) provides a mandate for withholding tax @ 10% on dividend income. In the absence of a Permanent Account Number (PAN), the TDS rate of 20% will apply.

If resident investors’ dividend income, including an interim dividend in FY 2021–2022, does not exceed Rs. 5,000 or if investors submit Form 15H/Form 15G, there would be no tax deduction for dividends paid to resident investors. In order to claim no tax or a lower tax, resident investors can additionally provide other documentation as required by the Income Tax Department.

For a non-resident individual who is a shareholder of the particular company, the entire dividend will be subject to TDS, with no threshold/verge limit. The tax deducted is 7.5% if a present, valid PAN is updated with the company or the depository/RTA. The TDS rate will be 20% in all other cases.

Conclusion

In conclusion, dividends are an important source of income for many investors in India. You can choose the best stock with prior research and analysis in terms of both technical and fundamentals. Then look for the best dividend-yielding stock from them if you prefer so. Also, the type of dividend you prefer among the several types we saw in this blog. Bond dividends and liquidation dividends have a different context.

However, it is important to understand the tax implications of dividends and how they can affect your overall investment strategy. By taking the time to research and understand the tax laws surrounding dividends in India, you can make informed decisions about your investments and maximize your returns.

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