Forgot to Report Dividend Income? Here’s How It Can Cost You
- PRITI SIRDESHMUKH
- Sep 11
- 8 min read
Dividend income is a significant source of passive income for many individuals and investors, but it often comes with tax implications that taxpayers must be aware of. Understanding the taxability of dividend income and the reporting requirements can help taxpayers comply with tax laws and avoid penalties. The tax treatment of dividends has undergone several changes in recent years, and it’s crucial for taxpayers to report this income correctly. Let's explore the taxability of dividend income, the consequences of failing to report it, available deductions, and how to rectify mistakes. It also discusses the role of advance tax in relation to dividend income, helping you stay compliant with the latest tax regulations.
Table of Contents:
Dividend Income Taxability and Reporting Requirements
In India, dividend income is taxable under the head “Income from Other Sources.” For the Financial Year 2024-25, dividend income is taxed based on the individual’s total income and the applicable tax slab. As of now, the government has removed the Dividend Distribution Tax (DDT), which was previously levied on the company distributing the dividend. Now, the responsibility to pay tax on dividend income falls on the individual receiving the dividend.
The tax rate on dividend income varies depending on the total income of the taxpayer. If your total income falls within the taxable limits, the dividend income will be taxed as per the applicable income tax slabs for individuals. For individuals in the highest tax bracket, the dividend income will be taxed at the regular income tax rate, while those in the lower tax brackets will be taxed accordingly.
Dividends received by Indian residents from domestic companies are subject to tax. However, dividends received from foreign companies may also be subject to tax, and foreign tax credit (FTC) provisions can apply in certain cases. Dividend income exceeding ₹5,000 is subject to Tax Deducted at Source (TDS) at a rate of 10% for resident individuals.
For reporting, dividend income must be disclosed in the Income Tax Return (ITR) under the head “Income from Other Sources.” Accurate reporting ensures that you comply with tax obligations and avoid penalties for under-reporting income.
Consequences of Not Reporting Dividend Income
Failure to report dividend income on your ITR can lead to serious consequences, including penalties, interest charges, and potential scrutiny by the Income Tax Department. If you do not report your dividend income, it may be considered tax evasion, resulting in penalties under Section 271(1)(c) of the Income Tax Act, which may range from ₹10,000 to ₹1,00,000, depending on the nature and severity of the omission.
In addition to penalties, the Department may levy interest under Sections 234A, 234B, and 234C for not paying taxes on time or for underestimating the tax liability. These sections impose interest for late filing, non-payment of advance tax, and deferment of taxes due, respectively.
Moreover, failing to report dividend income may delay the processing of your refund, as the authorities will identify discrepancies during the scrutiny process. Any refunds due to you may be delayed until the issues are resolved.
Allowable Deductions Related to Dividend Income
While dividend income is fully taxable, there are certain deductions available to taxpayers. One of the main deductions is under Section 57, which allows taxpayers to deduct certain expenses related to earning dividend income, such as interest on loans taken to invest in shares, brokerage fees, and other expenses directly related to earning the dividend. However, it's important to note that the deduction under Section 57 is allowed only if the taxpayer has incurred these expenses.
Another benefit is the exemption of dividends from a foreign company. For foreign dividends, taxes paid in the country of origin may qualify for a Foreign Tax Credit (FTC), which can be used to reduce the tax burden on the same income in India.
There is also a Tax Deducted at Source (TDS) on dividend income, which, if applicable, can be used as a credit against your final tax liability. In this case, the TDS will be deducted by the company distributing the dividend, and you can claim the same as a credit whilefiling your return, ensuring that you do not pay tax on the same income twice.
Steps to Rectify If Dividend Income Was Not Reported
If you realize that you have missed reporting dividend income on your original ITR, it is crucial to correct this mistake as soon as possible. You can rectify the error by filing a revised return under Section 139(5)of the Income Tax Act. This section allows taxpayers to revise their returns if they have made a mistake or missed reporting income.
To do this, follow these steps:
Log in to the Income Tax Department Portal: Use your PAN and password to access the e-filing portal.
Select the “Revised Return” option: After logging in, select the option to file a revised return. You will need to enter the original ITR acknowledgment number.
Update your dividend income: Correctly report the omitted dividend income under the “Income from Other Sources” section of the revised return. Also, ensure that any tax deductions, if applicable, such as TDS, are correctly reported.
Submit the revised return: After making the necessary corrections, submit the revised return. You will receive an acknowledgment number for your revised return, which confirms that your ITR has been updated.
Pay any additional tax: If the revised return results in additional tax liability, make sure to pay it within the stipulated time to avoid penalties and interest.
Advance Tax and Dividend Income
Since dividend income is taxable, it may also be subject to advance tax payments if your total tax liability exceeds ₹10,000 in a financial year. Dividend income, along with other sources of income, should be considered while calculating advance tax liability. If you receive substantial dividends throughout the year, you may need to pay advance tax in quarterly installments.
For taxpayers who expect to receive significant dividend income, it’s crucial to estimate their tax liability early and make advance tax payments. Failing to pay advance tax can result in interest charges under Sections 234B and 234C, which apply if the taxpayer does not pay the required advance tax or delays payment.
Conclusion
Dividend income is an important part of many individuals’ financial portfolios, but it’s essential to understand its taxability and reporting requirements. Failure to report dividend income correctly can lead to penalties, interest charges, and delays in refund processing. By ensuring that dividend income is properly disclosed in your ITR and claiming allowable deductions, you can stay compliant and minimize your tax liability. If you realize that you have not reported dividend income, it is important to correct the mistake by filing a revised return. Being proactive with advance tax payments will also ensure that you avoid interest charges and stay on top of your tax obligations. For anyone looking for assistance in tax filing, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.
FAQs
Q1: How is dividend income taxed in India? In India, dividend income is taxed under the head "Income from Other Sources." The tax rate applicable to this income depends on the individual’s total taxable income and the applicable income tax slab. For individuals whose total taxable income exceeds ₹2.5 lakh, dividend income is taxed as per the respective income tax slab rates. Before 2020, dividend income was exempt from tax up to ₹10 lakh, but now it is taxed at the applicable individual tax rates.
Q2: Do I need to report foreign dividend income? Yes, foreign dividend income is taxable in India. If you are a resident Indian, you are required to report foreign dividend income in your ITR, and it will be taxed as per the Indian income tax rules. You can also claim a foreign tax credit if you have already paid taxes on that income in the foreign country, reducing the double tax burden. This credit is subject to specific conditions and must be claimed correctly on your ITR.
Q3: Is there any deduction available for dividend income? Yes, deductions are available under Section 57 of the Income Tax Act for expenses incurred to earn dividend income. For example, if you paid interest on a loan taken for investment in shares from which you earned the dividend, this interest can be deducted from your total dividend income. Similarly, brokerage fees and other related expenses can be claimed as deductions, which can help reduce the taxable dividend income.
Q4: What happens if I don’t report dividend income in my ITR? Failing to report dividend income in your ITR can lead to serious consequences. The Income Tax Department may issue notices for non-disclosure of income, and you may be subject to penalties, interest charges, and even further scrutiny of your financial records. Additionally, if you miss reporting dividend income, it may delay the processing of your refund, and you could face an extended assessment period, resulting in further complications.
Q5: How can I rectify a mistake if I missed reporting dividend income? If you missed reporting dividend income, you can rectify the mistake by filing a revised return under Section 139(5) of the Income Tax Act. The revised return allows you to correct any errors or omissions in the original return. This can be done within the assessment year or before the completion of the assessment, whichever comes earlier. By filing the revised return, you can ensure that your dividend income is accurately reported and avoid penalties.
Q6: Can I claim TDS on dividend income? Yes, if TDS (Tax Deducted at Source) is deducted on your dividend income, you can claim the same as a credit while filing your ITR. The TDS is generally deducted by the company paying the dividend before disbursing the payment. You can claim this TDS against your total tax liability, and it will reduce the amount of tax you need to pay, as per the TDS certificate provided by the payer.
Q7: Do I need to pay advance tax on dividend income? If your total tax liability, including dividend income, exceeds ₹10,000, you will be required to pay advance tax. The advance tax is paid in installments throughout the year, and if it is not paid, interest under Sections 234B and 234C will apply. Dividend income is included in the total income for calculating the advance tax liability, and you should plan accordingly to avoid penalties and interest.
Q8: Is dividend income subject to tax if my total income is below the taxable limit? Yes, dividend income is taxable even if your total income is below the taxable limit. However, if your total income is below the threshold of ₹2.5 lakh (for individuals below 60 years), you will not need to pay tax, as the income will fall under the exemption limit. The dividend income will still be considered while calculating your total income, but no tax will be payable if your total income does not exceed the basic exemption limit.
Q9: How can I check if TDS has been deducted on my dividend income? You can check if TDS has been deducted on your dividend income by accessing yourForm 26ASon the Income Tax Department’s official website. Form 26AS is a consolidated tax statement that includes details of TDS deducted on your income, including dividend income. By checking Form 26AS, you can verify the TDS deducted and claim the credit while filing your ITR.
Q10: How do I calculate the tax on dividend income? The tax on dividend income is calculated by adding it to your total income for the financial year and taxing it at the applicable income tax slab rates. If your total income exceeds the exemption limit of ₹2.5 lakh, the dividend income will be taxed at the applicable rate based on the income slab you fall under. For example, if you are in the 20% income tax slab, your dividend income will be taxed at 20%.
Q11: Can I revise my ITR if I miss reporting dividend income? Yes, you can file a revised return under Section 139(5) if you realize that you missed reporting dividend income in your original ITR. The revised return allows you to correct any mistakes or omissions made in the initial filing. It is important to file the revised return before the completion of the assessment year or before the assessment is completed, whichever comes first.
Q12: Is there any exemption on dividend income for residents? No, there is no specific exemption on dividend income for resident individuals in India. Dividend income is taxable under the head "Income from Other Sources." However, you can claim deductions under Section 57 for any expenses incurred to earn the dividend income, such as interest on loans or brokerage fees. These deductions can help reduce the taxable dividend income, but there is no blanket exemption for resident taxpayers.
