How to Avoid TDS on Shares and Mutual Funds by filing Form15G or 15H
Hon’ble Finance Minister, in her budget speech had proposed to abolish the dividend distribution tax (DDT) on companies and mutual funds. The Budget proposed a shift to classical system of taxing dividend in the hands of shareholders/unit holders from 1st April, 2020. After the amendment made by the Finance Act, 2020 now dividends are taxable in the hands of the recipients.
Taxation of Dividends pre Budget 2020
- Under the distribution tax regime, DDT was paid by the company on the dividends and the income was exempt in the hands of the shareholders.
- Domestic companies were liable to pay DDT at 15% (plus surcharge and cess) of the aggregate dividend declared, distributed or paid.
- Such payment of DDT was treated as the final payment of tax in respect of such dividend paid to non-residents.
- Resident shareholder (other than domestic companies, fund specified under Explanation to section 115BBDA of the Act and trust registered under section 12A or section 12AA of the Act) was required to pay tax at 10% (plus applicable surcharge and cess) on dividend income exceeding Rs 10 lakh.
Taxation of Dividends post Budget 2020
The dividends distributed by companies and mutual funds on or after 1st April, 2020 is the taxable income of the investor.
- For Individual – Dividend shall be taxable as per the applicable slab rates. TDS will be deducted at 10% on dividends received above Rs 5,000 in a year. Government also abolished additional tax of 10% on dividend income in excess of Rs. 10 lakh per year for Resident non-corporate taxpayers.
- For Companies/Corporate Shareholders – Dividend shall be taxable as per the effective tax rates, which would range from 25.17% to 34.94%.
- Mutual Funds – The insertion of section 194K under the Act in which Mutual Funds, on payment of dividend to residents, will be required to deduct TDS at the rate of 10%.
- For Non-Resident Shareholder – Indian companies shall be liable to withhold taxes at 20% on payment of dividend to a non-resident shareholder. This rate could be lower if the benefit under the tax treaty is available to such shareholders.
Deduction of Section 80L during the old Income Tax Regime
- Section 80L was introduced into the Income Tax Act 1961 under “Chapter VIA – deductions in respect of certain incomes” with effect from April 1, 1968.
- Dividend from Indian companies and interest income on government securities and certain specified assets was allowed as deduction under Section 80L. The benefit of section 80L was finally withdrawn by the Finance Act 2005.
- In the past when dividend was taxable in the hands of the recipients, deduction was available to the shareholder of up to Rs12,000 per year for the dividend income under Section 80L
- Now, even though dividend has been made taxable, section 80L or its equivalent has not been brought into effect.
- Now, the entire dividend income is taxable without any deduction of the type that was available prior to 1st April 2003.
Issue of TDS that emerged due to taxation of dividend
Effective April 1, 2020, as per the Income Tax Act, 1961, the dividend income is taxable in the hands of shareholders. Accordingly, if any resident individual shareholder is in receipt of dividend exceeding Rs. 5,000 in a fiscal year, entire dividend will be subject to TDS @ 7.5%. The rate of 7.5% is applicable provided the shareholder has updated his/her Permanent Account Number (PAN) with the depository/ Registrar and Transfer Agent (RTA). Otherwise the TDS rate will be 20%.
Concession from payment of TDS on Dividend
Sometimes it is possible that the total income even after including dividend income will not exceed the threshold limit. In such cases, if the company that is paying the dividend deducts TDS then it would unnecessarily block the much required funds of that person and he/she would have to claim refund of the same. To avoid such a problem, the Income Tax Act provides a facility to such taxpayers to avoid TDS by submitting Form 15G or Form 15H to the company or mutual fund in advance (at the beginning of the year) and thereby authorize the said company or mutual fund to not deduct TDS in that year.
What are Forms 15H and 15G?
A resident individual can submit Form 15G (in case of non-senior citizens) and Form 15H (in case of senior citizens) for nil deduction of taxes (TDS) from the dividend income in case the tax on his estimated total income for that financial year is nil. For this, PAN is compulsory.
A resident individual can furnish Form 15G for non-deduction of tax from the dividend to company and/or mutual fund. Such declaration can be filed by the individual if total dividend income does not exceed the maximum exemption limit and tax on the estimated total income for the financial year in which such income is to be included is nil.
Conditions to be complied with for filing Form 15G:-
- Person must be a resident individual.
- Age should be below 60 years
- Total dividend income estimated to be received during the financial year should be less than the basic exemption limit of Rs 2.5 lakh
- Total estimated tax liability in the financial year should be nil
Form 15H is applicable to senior citizens (which term is defined to mean any person who is more than 60 years of age) with no taxable income.
Conditions to be complied with for filing Form 15H:-
- Senior citizen (more than 60 years of age) must be a resident individual
- Estimated tax payable on your total income for the relevant financial year should be nil.
This is a major compliance burden on the share/unit holders especially in those cases where there a large number of companies or mutual funds in which the taxpayer holds investments.
Many people with very moderate and low incomes or senior citizens experience considerable problems with taxation and complying with their tax obligations. In general, this is not a group of people who are trying to evade or avoid tax, but there are numerous obstacles in the way of their compliance.
For FY 2020-21, in view of the spread of the disease COVID-19, taxpayers may not be able to submit the forms in the first week of April 2020. Hence, the government had extended the validity of the Form 15G and Form 15H expiring on 31st March, 2020 up to 30th June 2020. However, taxpayers who wish to avoid TDS from their dividend income will have to go through the procedure of submitting the Form 15G or 15H to each company or mutual fund from which dividend income in excess of Rs 5,000 is expected during the year.