Dividend income is a type of income that is earned by individuals who invest in stocks or mutual funds. Dividend income is paid out by companies to their shareholders as a portion of their profits. This type of income is subject to taxation under the Income Tax Act, 1961. In this blog, we will discuss the taxability of dividend income and how to calculate the tax payable on it using an income tax calculator.
Dividend Income Can Be Of Two Types:
Taxable Dividend Income: This type of dividend income is taxed as per the income tax slab rate of the taxpayer. The tax rate can vary from 0% to 30% depending on the income of the individual.
Non-Taxable Dividend Income: This type of dividend income is not subject to income tax. It is paid out by mutual funds that invest in government securities or infrastructure bonds. This income is exempted from income tax under Section 10(35) of the Income Tax Act, 1961.
For individual taxpayers, dividend income is taxable under the head “Income from Other Sources.” The tax on dividend income is calculated as per the income tax slab rate of the taxpayer. For example, if an individual’s taxable income is Rs. 10 lakhs per annum, the tax on dividend income will be calculated at the rate of 20%.
To calculate the tax payable on dividend income, you can use an income tax calculator. An income tax calculator is a tool that helps you calculate the amount of tax you need to pay on your income. To use an income tax calculator, you need to enter your taxable income, deductions, and other relevant information. The calculator will then calculate the amount of tax payable by you.
Sources Of Dividend Income
Company Stocks: When an individual invests in stocks of a company, they become a shareholder of that company. When the company earns a profit, it distributes a portion of it to its shareholders as dividend income. The amount of dividend income received by the shareholder depends on the number of stocks held by the individual and the dividend declared by the company.
Mutual Funds: Mutual funds are investment vehicles that pool money from multiple investors to invest in various financial instruments such as stocks, bonds, and other securities. When a mutual fund earns a profit, it distributes a portion of it to its investors as dividend income. The amount of dividend income received by the investor depends on the number of units held by the individual and the dividend declared by the mutual fund.
Exchange Traded Funds (ETFs): ETFs are similar to mutual funds in that they also pool money from multiple investors to invest in various financial instruments. However, ETFs are traded on stock exchanges like stocks. When an ETF earns a profit, it distributes a portion of it to its investors as dividend income. The amount of dividend income received by the investor depends on the number of units held by the individual and the dividend declared by the ETF.
Real Estate Investment Trusts (REITs): REITs are investment vehicles that invest in income-generating real estate properties such as commercial buildings, rental apartments, and hotels. When a REIT earns rental income or sells a property at a profit, it distributes a portion of it to its investors as dividend income. The amount of dividend income received by the investor depends on the number of units held by the individual and the dividend declared by the REIT.
Government Securities: When an individual invests in government securities such as bonds, debentures, and treasury bills, they earn interest income. In some cases, the government may also distribute a portion of the surplus as dividend income. The amount of dividend income received by the investor depends on the type of government security held by the individual and the dividend declared by the government.
Let’s understand the taxability of dividend income with an example.
Suppose Mr. X earned a dividend income of Rs. 50,000 in the financial year 2022-23. Mr. X’s total taxable income for the year is Rs. 8 lakhs. As per the income tax slab rate for the financial year 2022-23, Mr. X falls under the 20% tax bracket. Therefore, the tax on Mr. X’s dividend income will be calculated at the rate of 20%.
The tax payable by Mr. X on his dividend income will be calculated as follows:
Tax on dividend income = 20% of Rs. 50,000 = Rs. 10,000
Thus, Mr. X will have to pay a tax of Rs. 10,000 on his dividend income of Rs. 50,000.
In Conclusion, dividend income is a type of income that is subject to taxation under the Income Tax Act, 1961. The tax on dividend income is calculated as per the income tax slab rate of the taxpayer. Non-taxable dividend income is exempted from income tax under Section 10(35) of the Income Tax Act, 1961. To calculate the tax payable on dividend income, you can use an income tax calculator. It is essential to calculate the tax payable on dividend income correctly to avoid any penalties or legal action.