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Relief in Dividend Income as per Budget 2021

Under Budget 2020, the Union Finance Minister Nirmala Sitharaman had announced that the Dividend Distribution Tax, commonly known as DDT, will be abolished. Since DDT was abolished, Dividend Income which was earlier an exempt income, now became taxable. As a result, the FM also introduced a new TDS Section 194K (TDS on Dividend from Equity Mutual Funds) and amended the existing Section 194 (TDS on Dividend from Equity Shares) for deduction of TDS if such dividend income exceeds INR 5,000 during the financial year.

Changes in Budget 2021 for Dividend Income

No Advance Tax on Dividend Income (Applicable from 01/04/2021 i.e. AY 2021-22)

Payment of advance tax has now become easier and would save late payment interest for the taxpayers. Under Budget 2021, the Finance Minister proposed that the advance tax liability on dividend income shall arise only after the dividend is declared or paid.

As per Section 234C of the Income Tax Act, if a taxpayer fails to pay advance tax, interest is applicable at the rate of 1% per month. Earlier, it was very difficult for the taxpayer to estimate the dividend income which thus resulted in unnecessary interest liability under Section 234C (the penalty for delay in advance tax payment). 

Under Budget 2021, this section has been amended by introducing a provision that interest under Section 234C should not be calculated if it is not possible to accurately determine the advance tax due to intrinsic nature of income. As per the new provision, the liability to pay advance tax would arise only when the dividend is declared or paid. This makes the payment of advance tax easier for the taxpayers.

No TDS on Dividend to REIT / InvIT – Applicable retrospectively from 01/04/2020 i.e. AY 2020-21)

TDS under Section 194 of the Income Tax Act is required to be deducted on payment of dividend to a resident. This section has been amended by introducing a provision that TDS should not be deducted for the dividend paid to a business trust by a special purpose vehicle or any other notified person.

Therefore, to provide an ease of compliance, the dividend paid to REIT (Real Estate Investment Trusts) and InvIT (Infrastructure Investment Trusts (InvIT) is exempt from TDS. Thus, even if the dividend on equity shares or equity mutual funds exceeds INR 5,000 during the financial year, TDS is not required to be deducted on such payment. The idea behind removing this provision is to rationalise the taxation of dividends and attract more investment.

In addition to the above changes, the Finance Minister also proposed to enable deduction of TDS on dividend paid to Foreign Portfolio Investors at lower treaty rate instead of the normal TDS rates.

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Got Questions? Ask Away!

  1. Hey @Rachit_Awasthi1,

    Under Budget 2020, the Finance Minister abolished Dividend Distribution Tax i.e. DDT. As a result, dividend became a taxable income. Since it was now taxable, TDS would be applicable on it. Thus, the Budget also introduced the provision to deduct TDS on the dividend.

    • Sec 194 - A Company should deduct TDS at 10% on dividend paid on equity shares if the dividend amount exceeds INR 5,000. For FY 2019-20, this rate is reduced to 7.5%
    • Sec 194K - An AMC should deduct TDS at 10% on dividend paid on equity mutual funds if the dividend amount exceeds INR 5,000. For FY 2019-20, this rate is reduced to 7.5%

    TDS (Tax Deducted at Source) is applicable to many taxable incomes such as salary, professional fees, interest, commission etc. Since dividend income is a taxable income, TDS is applicable to it.

    You can claim the credit of deducted TDS as taxes already paid when you file your Income Tax Return. If the tax liability is more than TDS credit, you need to pay only differential tax. If the tax liability is less than TDS credit, you can claim a refund of the excess amount.

    If you have received an email for dividend you can know more about TDS on dividend paid in FY 2020-21 in the article mentioned below.

  2. I am salaried person, gross income 10 lakh and comes in individual resident category. I invested in share market and also get dividend 8000. But i am confused that how much dividend amount is tax-free in below options:

    1. TDS will be deducted at 10% on dividends received above INR 5000.

    2. Tax of 10% on dividend income in excess of Rs. 10 lakh per year.

    so which option is correct for current FY and option 2 is applicable to whom ?

  3. Option 2 of 10 lakhs applicable to which category ?

  4. Hey @Kuldeep_Singh,

    From AY 2021-22 onwards, dividend received by shareholder will be taxed in the hands of shareholders and not on company. Dividend is not tax free income and hence if total dividend exceeding of Rs. 5000 is liable to deduct TDS u/s 194 at the rate of 10%.

    Prior to AY 2021-22, tax on dividend was applicable to shareholders only when total amount exceeds 10 lakhs but now there’s no relevance of sec.115BBDA.

    For more understanding, you can refer below article for taxation on dividend income:

    Hope, it helps!

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