NRIs are liable to pay tax on dividend income1 min read . Updated: 07 Sep 2020, 11:02 PM IST
Until 31 March, dividend income from an Indian company was exempt from Income tax in India with certain exception for super rich 'residents'
I have been living in the UK for five years now, and I started investing in Indian stocks this year. Is there a limit on dividend income for non-resident Indians (NRIs) and how will the dividend be taxed in my hands?
—Name withheld on request
Until 31 March, dividend income from an Indian company was exempt from Income tax in India with certain exception for super rich “residents". The Finance Act, 2020 changed the dividend taxation system and reintroduced the classical system of dividend taxation in the hands of shareholders, with effect from 1 April 2020.
For shareholders qualifying as NRI, dividend income is taxable at the rate of 20% plus applicable surcharge and 4% health and education cess (maximum marginal rate of 28.5%) on a gross basis.
However, under the double taxation avoidance agreement (DTAA) between India and the UK, such dividend will be taxable at the rate 15% or 10% (as applicable).
To apply for the beneficial rate of 15% or 10% under DTAA, you will need to qualify as “resident" of the UK, obtain a tax residency certificate (TRC) from the UK tax authorities and furnish it along with Form 10F to the Indian dividend paying company.
The Indian company will withhold tax on dividend either (a) at 20% plus applicable surcharge and 4% health and education cess or (b) at rate under the DTAA. You will need to inform the Indian company if you intend to claim the beneficial rate of 15% or 10% under DTAA and furnish the necessary declarations.
In your case as an NRI under the income tax law, if the withholding tax is at 20% plus applicable surcharge and 4% health and education cess, and you do not have any other taxable income in India, then you are not required to furnish income tax return (ITR) in India. However, as an NRI, if you avail of the benefit of a lower tax rate under DTAA, you would be required to furnish ITR in India.
Sonu Iyer is tax partner and people advisory services leader, EY India. Send in your queries and views at firstname.lastname@example.org