Background
- Non-residents (NRIs, OCIs, Foreign Companies) invest in india in various Mutual Funds, Shares. On this investment they earn two kind of income. One is capital gain on sale of these instruments, and other is Dividend. This dividend is declared and paid by the Company whose Shares or Mutual Funds they are holding.
- In India, till FY 2019-20 (i.e. ITR AY 2020-21), Dividend was an exempt income in the hands of recipient (Sec 10). Companies were paying a direct tax to Govt of India in the form Dividend Distribution Tax (DDT). This DDT was 15% (plus Surcharge 15% and Cess 4%); effectively 20.36%.
- Also, there was an additional taxation in high value shareholders hands. U/s 115BBDA, those shareholders, whose total dividend income was exceeding Rs 10 Lakh, were to pay tax @10% on the Dividend Income. Hence, double taxation i.e. DDT (20.36%) and Income Tax (10%). However, this section (115BBDA) was not applicable on Non-Residents.
- Hence, upto FY 2019-20, Dividend was completely exempt in the hands of Non-Residents (i.e. NRIs, OCIs, Foreign Companies). Consequently, there was no Withholding Tax (TDS) as well on Non-Residents.
- NRIs, OCIs, Other Non-residents were taxable in their residence country for the Dividend Income received. However, they were not eligible to seek credit of DDT paid in India by Indian Company. Hence, it was kind of double taxation for Non-residents.
Present Dividend Taxation Of Non-Residents – FY 2020-21 Onwards
- In Finance Act 2020, (i.e. effective from FY 2020-21), Indian Govt has reversed the taxation of dividend.
- Now, DDT has been abolished. And Dividend has been made taxable in the hands of shareholders.
- Hence, Non-resident has to pay tax on Dividend in India. As per the provisions of Sec 115A, tax on dividend is 20%. However, as per DTAA, Non-residents are also eligible for lower tax rate (Most of DTAAs have 10%/15% Tax rate on Dividend Income). For DTAA benefit, they need to provide TRC to Indian Companies.
- Companies shall deduct TDS on Dividend payment to Non-residents. TDS will be deducted u/s 195, 196D etc (as per applicable rates).
- NRIs, OCIs are eligible to claim tax credit in their residence country for TDS deducted by Indian Company.
- Seafarers, Mariners, who are generally Non-residents, will also be eligible for the Non-resident benefits wherever applicable.
- This new dividend taxation rule will be applicable for FY 2020-21 ITR (as well future) filing in India.
- NRIs, OCIs, Seafarers need to be cautious that they have duly submitted complete and accurate details of their dividend income in their ITR filing in India. Else, the same may result in notices from Income Tax Department
- Indian companies need to comply many procedures in relation to Non-resident Dividend e.g. TRC collection, applying correct TDS rate, filing of 15CA/15CB with Income Tax Departement, Remittance of Dividend etc.