I hold shares of a company that has sent me an email that it would deduct TDS on the dividend it pays on my equity shares. Why does tax need to be deducted from my dividend?
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.