NEW DELHI: With the Union government deciding to tax dividend income at the hands of the investor from April 1 this year, taxpayers receiving dividends of more than Rs 5,000 per year will see tax deducted at source (TDS) while receiving the payout from the company or mutual fund.
However, for taxpayers whose estimated taxable income for the new financial year results in nil tax liability, there is a route to avoid TDS eating into their dividends: Income Tax (I-T) forms 15G and 15H (for senior citizens).
Under the new tax regime implemented from this financial year, the erstwhile Dividend Distribution Tax (DDT) has been done away with. Instead, dividend income will be taxed at the hands of the taxpayer (either individual or HUF) at the rate applicable to their income slab, similar to interest income from bank and other deposits.
From April 1, mutual fund houses and companies disbursing dividend income to investors are required to deduct TDS at the rate of 10 per cent during payout if the total dividend to the taxpayer exceeds Rs 5,000 per year. However, similar to the rules for interest income, taxpayers whose estimated total taxable income for FY 2020-21 results in nil tax liability can file the relevant form with the company or MF.
Individuals and HUFs
For Individual taxpayers or a Hindu Undivided Family (HUF), the form that needs to be filed is 15G, which is essentially a declaration that the concerned taxpayer is not eligible to pay any tax on total income this year. For taxpayers above 60 years of age, the required form is 15H.
According to current I-T guidelines, if the taxpayer chooses to proceed under the old tax system with full applicable exemptions and deductions, they are not liable to be taxed for a total taxable income of up to Rs 5 lakh per annum.
Under the new system with no deductions, while income from Rs 2.5-5 lakh is taxable at 5 per cent, the government allows a rebate of Rs 12,500 for individual taxpayers under Section 87A.
This makes tax incidence zero for individuals with total income below Rs 5 lakh per annum, but 87A is not applicable to HUFs.In order to avoid paying TDS, an Individual or HUF’s total dividend income for the fiscal should also not exceed the maximum exemption limit of Rs 2.5 lakh per annum.
Senior citizens
However, in the case of senior citizens, 15H may be filed without regard for the maximum total dividend income threshold. A senior citizen will be eligible to avoid TDS on dividend income as long as their total estimated tax incidence for the year is nil.
Taking into consideration the difficulties surrounding the Covid-19 pandemic, the government has already announced that the deadline to file forms 15G/H for FY 2020-21 has been extended until June 30.