This Dividend Season, Get Your Calculations In Order

The dividend season for equity shareholders leads to a lot of inflows as companies declare and pay out their dividends. One of the key aspects for the investor in the entire process is to look at the income that has been earned and then show the correct figures while calculating taxes. While this might seem to be a simple thing, this overconfidence can lead to carelessness, which can end up with a notice from the tax department due to improper reporting of such income.

Here is how to tackle this issue:

One of the main aspects of dividend income from equity shares is that the amount is received by the individual in their bank account. Now, with the bank account details directly registered in the demat account, most dividends are directly deposited into the bank account of the investor. This makes it easier to track and find out whether the dividend from a particular company has been received or not, and also how much has been received.

An aspect related to dividends that the investor should know is that this is the net figure that they have got in their bank account and this will need some work, so that the actual amount of the dividend earned is known. This is especially true when there are multiple dividends that are received during the year from a single company.

Since the dividend received is the net amount, this is not the full amount of the dividend earned. When a company pays out dividend to a shareholder that is more than Rs 5,000 a year, then there is a Tax Deduction at Source that has taken place. The TDS is to the extent of 10% of the dividend amount and the amount received is 90% of the actual dividend.

For example, if a person has earned a dividend of Rs 7,000 from a company, then they will have a TDS of Rs 700 (10% of Rs 700) and the amount that they will get in their account is Rs 6,300. On the other hand, if they have got a dividend of Rs 3,200, then they will get the full amount of Rs 3,200 in their bank account because this has not exceeded the threshold for deduction of tax.

Thus, the individual has to see where there is a TDS and in those cases they have to gross up the amount of the dividend and this is their actual income. So, in the above case, Rs 7,000 is their dividend income and not Rs 6,300 which is received in their bank account.

On the one hand, the gross amount of the dividend has to be taken as income but at the same time they can also take the credit of the tax that has been deducted from this income.

The amount of tax that has been cut would be visible against their Permanent Account Number in the Income Tax Department records and this can be taken as credit for the total tax liability during the year.

This is important because now dividends received are taxable in the hands of the investor. The dividend is considered as income from other sources and depending on the total income of the individual, the applicable tax rate will have to be applied and the tax calculated.

This TDS, which has been made, will be useful as set-off against the tax liability. One must not forget to take this credit so that the right effect is given to all aspects of the income.

Arnav Pandya is founder at Moneyeduschool.