DYK: Dividend from investing in shares of foreign companies is taxable in India

Dividend income from foreign companies is not treated the same as dividend from domestic companies, for tax purposes

The two key advantages of investing in equities are the possibility of higher returns and tax efficiency. In the long term, equity has outperformed other asset classes. And, according to Income tax rules in India, capital gains from sale of equity investments after one year of investment are exempt from income tax. Dividends received from owning shares of Indian companies are also exempt from tax in the hands of shareholders. Moreover, investment in equities is not limited to domestic companies; to diversify and also in expectation of better returns, many Indians invest in shares of foreign companies as well.

According to data published by the Reserve Bank of India, during August 2015, under the Liberalised Remittance Scheme (LRS), outward remittance of $19.5 million was made in equities and debt. However, dividend income from foreign companies is not treated the same as dividend from domestic companies, for tax purposes.

TAXATION OF DIVIDEND

Dividend received from shares of an Indian company on which dividend distribution tax (DDT) has been paid is exempt from tax under section 10(34) of the Income tax Act, 1961. Under DDT, a uniform tax is paid by the company on the amount of dividend it decides to distribute. The exemption from tax under the mentioned section is available only for Indian companies and not for dividend received by an investor from a foreign company. Therefore, if you are planning to or if you have invested in a foreign company, make sure you take the dividend income from such investments into consideration while filing your income tax returns and pay the taxes accordingly.

Dividend incomes are considered under the income tax head “income from other sources.” Tax would be levied based on the tax slab applicable to the particular individual.

RELIEF FROM DOUBLE TAXATION

Though dividend received from foreign companies are taxable in the hands of the individual, if taxes are paid on such dividend in the country where company is based, the investor may claim relief under double taxation avoidance agreement (DTAA), provided India has such an agreement with that country. If no such agreement exists, an investor can even claim relief under section 91 of the income-tax Act. Say, you have invested in the shares of a foreign company abroad and earn Rs.50,000 as dividend. You have also paid Rs.5,000 as tax on this in that country. Then, while filing your tax return in India, if your tax liability on such income is Rs.15,000 (if you are in the highest tax bracket of 30%), you are allowed to claim relief of Rs.5,000 and pay only Rs.10,000 as tax here.

THINGS TO KNOW

Under LRS, an individual can invest or send up to $250,000 abroad in a financial year. Whatever be the reason for sending money abroad—investing in shares, buying immovable property, as a gift, for maintenance of family, or towards education—take time out to understand the tax implications of these transfers, the declaration that needs to be made in the tax return form, and limits.