Handling Income Tax Notices for Underreported Dividend Income in Your ITR
- Rajesh Kumar Kar
- Jul 11
- 9 min read
Dividend income is an essential component of investment returns for many taxpayers, particularly those with equity and mutual fund investments. While dividend income is generally exempt under certain conditions, it is still subject to taxation under the Income Tax Act, depending on the total income and the tax regime opted for. One common issue that taxpayers face is the underreporting of dividend income in their tax returns, leading to income tax notices from the Income Tax Department. These notices are often triggered when the reported dividend income does not match the TDS (Tax Deducted at Source) records or when there are discrepancies between the income reported and the actual income earned.
Table of Contents
Understand the Taxation of Dividend Income and TDS Provisions
Dividend income is taxable under the head "Income from Other Sources" in the Income Tax Return (ITR). However, the tax treatment of dividends has undergone significant changes in recent years. Under the current taxation framework, dividends are no longer exempt from tax at the time of receipt. Instead, they are taxed in the hands of the recipient. The key aspects of dividend taxation include:
Dividend Distribution Tax (DDT) Abolition: Prior to FY 2020-21, dividends were taxed at the corporate level under the Dividend Distribution Tax (DDT). However, the Finance Act 2020 abolished DDT, and dividends are now subject to tax in the hands of the recipient at applicable income tax rates.
Tax Rates: Dividends are subject to tax based on the individual's total income and the tax regime chosen. Under the new tax regime, dividend income is taxed according to the individual's income tax slab rate. However, in the old tax regime, it may also be eligible for deductions like the deduction under Section 80C, depending on the situation.
TDS on Dividends: When dividends are paid by companies, they are subject to Tax Deducted at Source (TDS). The rate of TDS is generally 10% for resident individuals, but it may vary based on the amount and the type of dividend payment. If the total dividend income exceeds ₹5,000 in a financial year, the company is required to deduct TDS on the dividends. The TDS amount is reported in Form 26AS, which taxpayers can use to reconcile their income and ensure they report it accurately in their tax returns.
Exemption and Thresholds: A dividend income of up to ₹10 lakh is taxable at a rate of 10%, while any dividend income exceeding ₹10 lakh is taxable at 20% under the provisions of the Income Tax Act.
Reasons for Income Tax Notices on Underreported Dividend Income
Income tax notices are commonly issued when there are discrepancies between the income reported in the tax return and the information available with the Income Tax Department, particularly when dividend income is underreported. Below are some common reasons why taxpayers might receive an income tax notice for underreported dividend income:
Mismatch Between Reported Dividend and TDS Records: If a taxpayer fails to report the correct amount of dividend income, which does not match the TDS deducted by the company, the Income Tax Department may issue a notice. The TDS deducted by companies is reflected in Form 26AS, and any discrepancies between the amounts shown in Form 26AS and the income reported in the ITR are flagged by the department.
Non-Reporting of Dividend Income: Sometimes, taxpayers might overlook the dividend income from certain investments or fail to report it accurately in their ITR. This can happen when multiple investments are made across different companies or mutual funds, and the dividend income is not consolidated properly. The department's systems are equipped to identify underreported income by cross-checking the data from various sources.
Failure to Report Foreign Dividend Income: For individuals who have foreign investments, dividends received from foreign companies are also subject to tax in India. If this income is not reported, it may trigger an income tax notice.
Failure to File or Incorrect Filing of Form 26AS: If the taxpayer’s Form 26AS does not match with the dividend income reported on the ITR, it can result in a mismatch. This is a primary reason for receiving a notice, especially if the TDS reflects a higher amount than what has been reported in the tax return.
Steps to Handle Income Tax Notices for Underreported Dividend Income
If you receive an income tax notice regarding underreported dividend income, the following steps can help you resolve the issue efficiently:
Review Form 26AS: Begin by reviewing your Form 26AS, which contains detailed information about the TDS deducted by the companies where you hold investments. Ensure that the dividend income reflected in the Form matches the dividend income you reported in your ITR.
Reconcile the Discrepancies: If there are discrepancies between the dividend income shown in Form 26AS and your ITR, you will need to reconcile the differences. Check if any dividends were missed or incorrectly reported. It may be helpful to gather your dividend statements from banks or companies that issued the dividends.
File a Revised Return: If you have underreported dividend income, you can file a revised return under Section 139(5) of the Income Tax Act. This allows you to correct any mistakes or omissions in your original return, provided it is within the assessment year.
Respond to the Notice: If the notice is regarding a discrepancy or mismatch, the Income Tax Department usually provides a specified period within which you must respond. If you have made the necessary corrections or provided additional documentation, respond to the notice within the stipulated time to avoid penalties.
Consult a Tax Professional: If you are unsure about the correct procedure or have difficulty resolving the issue, it’s advisable to consult a tax professional or a chartered accountant. They can assist you in filing the revised return or communicating with the tax authorities.
Preventive Measures to Avoid Notices
To avoid receiving income tax notices related to underreported dividend income, consider implementing the following preventive measures:
Accurate Reporting of Dividend Income: Always report your dividend income accurately in your ITR. This includes dividends from domestic and foreign companies, as well as mutual funds. Ensure that you capture all dividend payments and cross-check them with your Form 26AS.
Regular Monitoring of Form 26AS: Periodically check your Form 26AS to ensure that all TDS entries related to dividend income are accurately reflected. This will help you identify any discrepancies well before the tax filing deadline.
Maintain Proper Records: Keep track of all dividend receipts, whether they are from mutual funds, companies, or foreign investments. This will help you report all the dividend income correctly and ensure that you don’t miss any.
File Returns on Time: Ensure that you file your ITR on time and make sure all the income, including dividend income, is included. Filing your return on time also gives you an opportunity to file a revised return in case of any errors or omissions.
Consult a Tax Professional: If you have multiple sources of dividend income or complex tax filings, it’s beneficial to consult a tax professional. They can help you navigate the intricacies of reporting dividend income, particularly if it involves foreign dividends or large amounts.
Conclusion
Handling income tax notices related to underreported dividend income can be streamlined with proper record-keeping and timely responses. For anyone looking for assistance in tax filing, it is highly recommended to download the TaxBuddy mobile app for a simplified, secure, and hassle-free experience.
Frequently Asked Question (FAQs)
Q1: What should I do if I receive a notice for underreported dividend income?
If you receive a notice for underreported dividend income, the first step is to verify the dividend and TDS (Tax Deducted at Source) details on your Form 26AS and other relevant documents. If you have missed reporting any income or made an error, file a revised ITR (Income Tax Return) with accurate details. Ensure you pay any due tax and interest on the underreported income, as required by the Income Tax Department. Finally, respond to the notice by providing the required supporting documents and explanations for the discrepancy. This will help avoid penalties or further legal action.
Q2: Can I avoid TDS on dividend income?
Yes, you can avoid TDS (Tax Deducted at Source) on dividend income under certain conditions. If your total dividend income is below ₹10,000 in a financial year, no TDS will be deducted. Additionally, you can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to avoid TDS on dividend income, provided you meet the eligibility criteria, such as having no taxable income or your taxable income being below the taxable limit.
Q3: What happens if I do not report dividend income in my ITR?
If you fail to report dividend income in your ITR, the Income Tax Department may send you a notice for underreporting of income. The department may levy penalties and interest on the unpaid tax amount. It's crucial to accurately report all income, including dividend income, to avoid potential legal complications. Failure to report dividend income can also result in the scrutiny of your returns, which could further delay the processing of your refund.
Q4: How can I claim a refund if excess TDS is deducted on my dividend income?
If excess TDS is deducted on your dividend income, you can claim a refund by filing your Income Tax Return (ITR) accurately. In your ITR, report the full dividend income and the TDS deducted. When the ITR is processed, the excess TDS will be refunded to you. The refund will be issued either through a bank transfer or cheque, depending on the payment details you have provided in your ITR.
Q5: How does TaxBuddy help in managing dividend income tax compliance?
TaxBuddy simplifies the management of dividend income tax compliance by helping you track your dividend income, ensuring it is accurately reported in your ITR. The app also supports the submission of necessary declarations, such as Form 15G or 15H, to avoid TDS deductions if applicable. Furthermore, TaxBuddy offers expert support to help you respond to any tax notices you may receive and ensures that you comply with the latest tax regulations related to dividend income.
Q6: Can I submit Form 15G/15H to avoid TDS on dividends?
Yes, you can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to avoid TDS on dividends, provided you meet the eligibility criteria. These forms are declarations made to the payer (e.g., banks or companies) stating that your total income is below the taxable threshold, and thus, no TDS should be deducted. You need to ensure that your income is below the taxable limit before submitting these forms to avoid any discrepancies or penalties later.
Q7: How do I check my TDS details?
You can check your TDS details on Form 26AS, which is available on the Income Tax Department’s official website. Form 26AS shows the TDS deducted from your income, including dividends, and provides a detailed summary of the taxes paid. Ensure that the TDS details on Form 26AS match the TDS reflected in your ITR to avoid discrepancies. If any discrepancies arise, you should address them before filing your return.
Q8: How can I prevent TDS discrepancies in my ITR?
To prevent TDS discrepancies in your ITR, ensure that your PAN is correctly linked to your Aadhaar and updated with your bank or financial institutions. Regularly review your TDS details on Form 26AS to ensure that the TDS reported matches the amounts mentioned by your payers. Before filing your ITR, cross-check your dividend income and TDS against the records provided by the deductor to avoid mismatches, which could delay refund processing or result in notices.
Q9: What is the tax rate on dividends exceeding ₹10 lakh?
For dividend income exceeding ₹10 lakh in a financial year, an additional tax is levied at a rate of 10% on the excess amount above ₹10 lakh. This is applicable under Section 115BBDA of the Income Tax Act. The tax is applied on the dividend income that exceeds the ₹10 lakh threshold, meaning the first ₹10 lakh of dividend income is exempt from this additional tax, but any amount above it will be taxed at the specified rate.
Q10: How long do I have to respond to an income tax notice?
The response time to an income tax notice typically depends on the specific notice you receive. Generally, taxpayers are expected to respond within the time frame specified in the notice, which is usually 15 to 30 days. Failing to respond within the given timeframe may result in penalties or further legal actions. If you need more time, it’s advisable to request an extension from the tax department before the deadline expires.
Q11: Can TaxBuddy help with revised ITR filing?
Yes, TaxBuddy assists with filing revised ITRs. If you have made an error in your original filing, TaxBuddy allows you to easily file a revised return. The platform helps ensure that the updated return is filed accurately, including the correction of any mistakes related to dividend income, TDS details, or any other discrepancies. TaxBuddy also provides expert support to help you navigate the revised filing process efficiently.
Q12: How can I ensure compliance with dividend tax laws?
To ensure compliance with dividend tax laws, stay informed about the latest tax regulations and maintain accurate records of all your dividend income. Make sure to report your dividend income correctly in your ITR and submit necessary forms, such as Form 15G or 15H, to avoid TDS if applicable. Regularly check your TDS details on Form 26AS, and if any discrepancies arise, resolve them before filing your return. Using platforms like TaxBuddy can help ensure that your tax filings are accurate and timely, ensuring full compliance with the law.
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