As of 2025, India has active over 90 tax treaties covering income and capital. These treaties primarily aim to grant tax relief, prevent tax avoidance and evasion, and allow tax credit in the home country or vice versa. Understanding the tax implications of receiving dividends is crucial for investors and businesses.
Dividend Taxation in India
Dividends distributed by Indian companies were earlier subject to Dividend Distribution Tax (DDT) paid by the company. However, from the assessment year 2021-22, the tax regime changed. Now, dividends are taxable in the hands of the recipient. The company deducts tax at source (TDS) at 10% on dividends exceeding Rs. 5,000. For non-residents, TDS rates may vary based on treaty provisions.
Double Taxation Avoidance Agreements (DTAA)
India has signed Double Taxation Avoidance Agreements (DTAA) with over 90 countries. These agreements help taxpayers avoid paying tax twice on the same income. For dividends, the DTAA often provides a reduced withholding tax rate compared to the domestic rate. For instance, under the India-Singapore treaty, the withholding tax on dividends is 10% if the beneficial owner holds at least 25% of the shares, else 15%.
Tax Credit and Relief
If a resident taxpayer receives dividends from a foreign company, they may be eligible for foreign tax credit in India under Section 90 or 91 of the Income Tax Act. Similarly, non-residents receiving dividends from Indian companies can claim credit in their home country. The tax credit is available only if the taxpayer has paid tax on such income in the source country.
Key Points for Investors
- Resident Individuals: Dividends are taxable at the applicable slab rate. TDS is deducted at 10% if dividend exceeds Rs. 5,000. No tax is deducted if the dividend is below Rs. 5,000.
- Non-Resident Individuals: TDS is deducted at 20% (plus surcharge and cess) unless a lower rate applies under DTAA. The taxpayer must provide a Tax Residency Certificate and Form 10F to claim treaty benefits.
- Corporate Shareholders: Dividends received from domestic companies are taxable at 15% if the holding is less than 51%, else at 10% (subject to conditions). For foreign dividends, the tax rate is 30% unless treaty relief is available.
Recent Developments
In the Union Budget 2025, the government proposed to rationalize TDS on dividends for non-residents. Additionally, the tax treaty network continues to expand, with new agreements being negotiated with African and Latin American nations. Investors should stay updated on treaty changes to optimize their tax liability.
Conclusion
Dividend taxation in India has become more complex post-DDT abolition. It is advisable for investors to consult tax professionals to understand their obligations and avail treaty benefits. Proper planning can help avoid double taxation and ensure compliance with Indian tax laws.
