Is an NRI liable to pay advance tax on dividend income?
A private limited company may declare an interim dividend at any time during the financial year, provided it is paid out of the profits earned by the company during that financial year.
I am a joint venture partner of an Indian FMCG company and live in the Netherlands. Given the strong performance of the company after GST reduction in India, it would probably declare an interim dividend for the first time in the next board meeting scheduled in early December 2025. I was told that it will be received by all shareholders by the end of December. Am I liable to pay any advance tax on this dividend income, and if so, by when?
-Name withheld on request
Under the Indian Companies Act 2013, a private limited company may declare an interim dividend at any time during the financial year, provided it is paid out of the profits earned by the company during that financial year.
Once declared, the company is required to deposit the declared interim dividend amount to a separate dividend escrow account within five days of its declaration and disburse the dividend to shareholders thereafter within thirty days of its declaration.
Ordinarily, individuals who do not carry on any business or profession compute taxable income under the head ‘Income from Other Sources’ on a cash basis. However, in the case of interim dividends received from an Indian company, the timing of taxation is not determined by the method of accounting but by specific provisions of the Income Tax Act, 1961, which taxes dividend income once it becomes unconditionally available to the shareholder.
Given that the company law mandates an irrevocable transfer of the declared dividend amount to a designated bank account (with the funds being usable only for payment to shareholders or transfer to the unpaid dividend account/investor education and protection fund), the dividend is considered unconditionally made available to shareholders on the date of such deposit. Consequently, the dividend income is deemed to accrue to the shareholder on the date of deposit into the dividend escrow account.
Advance tax liability would arise only if the Indian company does not withhold the appropriate tax at source (TDS) on the dividend payment. The applicable TDS rate on the gross amount of dividend paid to a non-resident individual is 20% (plus applicable surcharge and cess). However, under the India-Netherlands double taxation avoidance agreement (DTAA), the tax on dividend income is restricted to 10%, subject to the shareholder furnishing a tax residency certificate (TRC) and Form 10F to the Indian company.
Accordingly, the third advance tax instalment due on 15 December 2025 for the financial year 2025-26 would not be relevant for you if the Indian company deducts the appropriate amount of TDS.
Harshal Bhuta is partner at P.R. Bhuta & Co. CAs
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