How to Report Dividend Income and Avoid Section 143(1) Notices for Incorrect Reporting

With the increasing number of investors and the growing popularity of dividend-paying stocks, understanding the taxation of dividend income has become crucial. In India, the taxation of dividend income has undergone significant changes in recent years, especially after the removal of the Dividend Distribution Tax (DDT) in 2020. As a result, dividend income is now taxable in the hands of the shareholders. This change has raised questions about how to report and tax dividend income correctly on your Income Tax Return (ITR). Reporting dividend income accurately is essential to avoid penalties, interest, and notices from the Income Tax Department. In this article, we will explore the steps to correctly report dividend income in your ITR, how to avoid incorrect filings that may lead to Section 143(1) notices, and provide insights into common concerns taxpayers have regarding dividend taxation.

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Table of Contents

• Understanding Dividend Income Taxation

• Steps to Correctly Report Dividend Income in Your ITR

• Avoiding Section 143(1) Notices for Incorrect Reporting

• Addressing Specific, Long-Tail Questions

• Conclusion

• FAQs

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Understanding Dividend Income Taxation

Dividend income refers to the income received by shareholders from the profits of a company. With the tax reform that removed DDT, dividend income is now taxable directly in the hands of the recipients based on their applicable tax slab rates. The following points outline key aspects of dividend income taxation:

• Taxable Nature of Dividends: Since April 1, 2020, dividends received from Indian companies are included under "Income from Other Sources" in the tax return. This income is taxable at applicable income tax slab rates based on the taxpayer's total income.
  

• Tax Rates on Dividend Income: The tax on dividend income depends on the taxpayer's total income and applicable tax slab. For example, if the total income exceeds ₹2.5 lakh, the individual must pay tax according to their income tax slab. There is no tax exemption limit for dividend income, and the tax is levied at the individual’s applicable rate.
  

• Tax Deducted at Source (TDS): Companies that pay dividends are required to deduct TDS before crediting the amount to shareholders. The TDS rate on dividends is 10%, provided the dividend exceeds ₹5,000 in a financial year. If the individual’s income is below the taxable limit, they can apply for a lower TDS rate by submitting a Form 15G or Form 15H.
  

• Exemptions and Deductions: Dividend income exceeding ₹5,000 is subject to TDS; however, taxpayers can claim a credit for TDS deducted while filing the ITR. Additionally, taxpayers who are in the lower tax bracket may be eligible for exemptions or relief through tax planning strategies.

Steps to Correctly Report Dividend Income in Your ITR

Filing accurate tax returns requires that you report your dividend income correctly. Here's a step-by-step guide on how to report dividend income on your ITR:

• Collect Dividend Income Details: Gather all the necessary information about the dividends you received during the financial year. This includes the amount of dividend, the name of the company, and the TDS deducted (if applicable). You can typically find this information in the dividend statement provided by the company or your broker.
  

• Choose the Right ITR Form: If you are an individual taxpayer, use ITR-1 (Sahaj) or ITR-2, depending on whether you are filing as a salaried individual or have other sources of income like capital gains, business income, etc. Dividend income must be reported in the section related to "Income from Other Sources."
  

• Report Dividend Income Under "Income from Other Sources": In the ITR form, locate the section titled "Income from Other Sources." Here, report the total amount of dividend income received during the year. If the dividend is received from foreign companies, it should also be declared under this section.
  

• Report TDS on Dividend Income: In case TDS has been deducted on your dividend income, report the amount of TDS in the relevant section of the ITR form. This will allow you to claim a credit for the TDS deducted and reduce your tax liability.
  

• Check for Other Deductions or Exemptions: If you have any specific deductions or exemptions applicable to your dividend income, ensure these are accounted for in your return. This could include tax treaties with foreign countries or deductions available under specific sections.
  

• Verify Your Form 26AS: Before filing, ensure that the dividend income and TDS details in your Form 26AS match the details you report in your return. Discrepancies between these details could lead to notices from the Income Tax Department.

Avoiding Section 143(1) Notices for Incorrect Reporting

Incorrect reporting of dividend income can trigger notices under Section 143(1) of the Income Tax Act. This section allows the Income Tax Department to process returns and raise any discrepancies found. Here’s how you can avoid such notices:

• Match Dividend Income with Form 26AS: Always cross-check the dividend income reported in your ITR against the details available in your Form 26AS, which reflects the TDS deducted and deposited by the companies. Discrepancies between what is reported in your ITR and what is in Form 26AS can result in an automatic mismatch notice.
  

• Ensure Correct TDS Reporting: Ensure that TDS deducted on dividends is reported accurately in the return. If the TDS has been wrongly reported or if the TDS amount is less than what was actually deducted, the department will notice the mismatch, leading to further scrutiny.
  

• Report Foreign Dividend Income Properly: If you receive dividends from foreign companies, make sure to report the correct currency conversion and applicable tax details. The Income Tax Department will cross-check the reported details with the corresponding exchange rates.
  

• Don’t Miss Exemptions: If you are eligible for exemptions or a lower rate of TDS, ensure that these are reflected correctly in your return to avoid issues. For example, senior citizens can claim exemptions on certain dividends, and failure to report this will lead to incorrect tax calculations.
  

• Avoid Underreporting: Always report all dividend income you receive. Underreporting income, even unintentionally, can result in a penalty or a notice from the tax authorities for non-disclosure.

Addressing Specific Questions

Q1: How do I claim credit for TDS deducted on dividend income? To claim credit for TDS deducted on your dividend income, you must report the TDS amount in the ITR form under the section for "Tax Paid" or "TDS on Income from Other Sources." The TDS will be matched against your Form 26AS, and the credit will be adjusted against your total tax liability.

Q2: Can I avoid paying tax on dividend income if my total income is below the taxable limit? If your total income is below the taxable limit (₹2.5 lakh for individuals below 60 years), you can submit Form 15G or Form 15H to the company paying the dividend to ensure that no TDS is deducted. However, you still need to report the dividend income in your ITR.

Q3: What happens if I miss reporting foreign dividend income? If you fail to report foreign dividend income, you may face penalties, and the Income Tax Department may issue a notice for the omission. Always report foreign income accurately and convert the amount into INR using the appropriate exchange rate.

Conclusion

Reporting dividend income correctly is essential to avoid penalties and ensure that your tax filings are compliant. With the removal of the Dividend Distribution Tax (DDT) and the taxation of dividends in the hands of shareholders, taxpayers must be diligent in reporting their dividend income on their ITR. By following the steps outlined, ensuring that the TDS is correctly reported, and cross-checking your return with Form 26AS, you can avoid notices and ensure a smooth filing process. For assistance in filing your ITR accurately, consider using TaxBuddy, a platform that offers guidance and error-free filing to help you stay compliant and avoid issues with the Income Tax Department.

FAQs

Q1: How do I report foreign dividend income on my ITR?

Foreign dividend income must be reported under the section "Income from Other Sources" in your ITR. When reporting, you must convert the foreign dividend income into Indian Rupees (INR) using the exchange rate that is applicable on the date you received the income. This ensures that the income is accurately reflected in your return. Additionally, make sure to include any TDS (Tax Deducted at Source) that was deducted by the foreign company, and claim a credit for it in your ITR if applicable.

Q2: Can I claim deductions on dividend income?

No, dividend income is fully taxable under the "Income from Other Sources" category, and there are no specific deductions available for it. However, if TDS has been deducted at source, you can claim a credit for the TDS deducted, which will reduce your overall tax liability. It’s important to ensure that the TDS deducted and reflected in Form 26AS matches what has been deducted from your income.

Q3: What is the TDS rate for dividends?

The Tax Deducted at Source (TDS) rate for dividends is 10% if the total dividend income exceeds ₹5,000 during the financial year. This TDS is deducted at the time the dividend is paid. If the dividend income is less than ₹5,000, no TDS is deducted. It’s important to check the details of TDS deduction in Form 26AS and report it accurately in your ITR to avoid discrepancies.

Q4: How do I ensure I don’t get a notice for incorrect dividend income reporting?

To avoid receiving a notice from the tax authorities, ensure that you report all your dividend income accurately in your ITR. Make sure the amount of TDS deducted on dividends matches what is shown in your Form 26AS. If any discrepancies occur, you should correct them by filing a revised return or by contacting the relevant company for clarification. If you are eligible for any exemptions (for example, if your total income is below the taxable limit), ensure that you apply for those exemptions while filing.

Q5: Can I avoid paying tax on dividend income?

If your total income is below the taxable limit for the financial year, you are not required to pay tax on dividend income. However, even if you are exempt from paying tax, you must still report your dividend income in your ITR. Additionally, if your total income is below the taxable limit, you can submit Form 15G or Form 15H to avoid TDS deduction at source, provided you meet the eligibility criteria (such as age or income conditions).

Q6: What happens if the TDS deducted on my dividend is incorrect?

If TDS is incorrectly deducted on your dividend income, the incorrect amount will be reflected in your Form 26AS. In such cases, you will need to file a revised return once the correct TDS amount has been reflected, or approach the company that issued the dividend to rectify the error. It is important to resolve these discrepancies as soon as possible to avoid delays in processing your refund or facing scrutiny from the tax authorities.

Q7: Is dividend income taxable for NRIs?

Yes, dividend income earned by Non-Resident Indians (NRIs) is taxable in India at the applicable TDS rates. The TDS rate for NRIs on dividend income is typically 20%, unless a lower rate is specified under a Double Taxation Avoidance Agreement (DTAA) between India and the NRI’s country of residence. NRIs can also claim a credit for TDS deducted in India against the taxes payable in their home country, based on the provisions of the DTAA, if applicable.

Q8: How do I file my ITR if I have dividend income from multiple companies?

If you have received dividend income from multiple companies, you should report all the income under the section "Income from Other Sources." Add up the total dividend income from all companies and report it accurately in your ITR. Additionally, ensure that the TDS deducted on the total dividend income is correctly reflected in Form 26AS. If any discrepancies occur, address them before filing your return.

Q9: What is the tax treatment of dividends from mutual funds?

Dividends received from mutual funds are taxed under the "Income from Other Sources" category. These dividends are subject to TDS at a rate of 10% if the total dividend income exceeds ₹5,000 during the financial year. If the total amount of dividends is less than ₹5,000, no TDS is deducted. Just like other dividend income, ensure that the TDS deducted matches what is reflected in your Form 26AS and report it accurately in your ITR.

Q10: Can I claim a lower TDS rate on my dividend income?

Yes, if your total income is below the taxable limit, you can submit Form 15G (for individuals below 60 years of age) or Form 15H (for senior citizens) to request a lower TDS rate or to ensure no TDS is deducted. This is applicable when your total income is below the taxable threshold, and you meet the specific criteria set for claiming the exemption. These forms must be submitted to the company distributing the dividend before the dividend payment is made.

Q11: How do I report dividend income from foreign companies?

Dividend income from foreign companies is reported in the same way as domestic dividend income—under "Income from Other Sources" in your ITR. However, foreign dividend income must be converted into Indian Rupees (INR) using the exchange rate prevailing on the date of receipt. If TDS was deducted by the foreign company, you may be eligible for a credit for the foreign taxes paid, depending on the tax treaty (DTAA) between India and the country where the company is based.

Q12: Are there any exemptions for dividend income?

Yes, there are some exemptions available for dividend income. If the total dividend income is below ₹5,000 in a financial year, no TDS is deducted. Additionally, if your total income is below the taxable limit, you can submit Form 15G or Form 15H to avoid TDS deduction. However, even in these cases, you must report your dividend income in your ITR. Exemptions for specific types of dividends (e.g., from mutual funds or government companies) may apply under certain conditions. Always check the applicable rules for the specific type of dividend you receive.