With the increasingly globalized world today, Indian investors are investing in foreign listed stocks in ever-increasing numbers to diversify their portfolios and secure better returns. Aside from any possibility of capital appreciation, one primary source of income from such investments is foreign dividends.
But foreign earnings like these have taxation implications. Understanding how foreign dividend income gets taxed helps investors comply with Indian tax laws and manage their finances more effectively. This guide discusses the entire process — from determining tax payable on dividends to computing and paying dividend tax in India.
What is Foreign Dividend Income?
A dividend is a portion of the profits of a company paid to its shareholders. If a resident of India gets a dividend of any foreign company — like shares of Apple or Microsoft — it is foreign dividend income.
Foreign dividends, like Indian dividends, are liable for tax in India. The only variation is how the tax on dividends is levied since two nations are involved:
- The nation where the entity is situated (the source country)
- India (the resident country)
Foreign dividends are generally treated as income from other sources under the Indian Income Tax Act, 1961. Hence, they are included in your total income and taxed at your applicable slab rate. It is important to determine the portion of your earnings that qualifies as a taxable dividend to ensure accurate reporting and compliance.
Taxable Dividend: Domestic vs. Foreign
Taxable dividend is the dividend income that you will have to report under your total gross income and tax accordingly. Dividends received from Indian entities have special provisions, while foreign dividends are governed by certain rules because of worldwide tax considerations.
Important points to consider:
- Withholding tax: The foreign government can deduct tax at source before releasing the dividend to you.
- Double taxation: Your dividend earnings can be taxed both abroad as well as in India.
- Foreign tax credit: You can credit foreign taxes paid by you in India, thereby minimizing your effective dividend tax burden.
All foreign dividends are not taxable dividends. Certain of them are exempt or receive lower tax under Double Taxation Avoidance Agreement (DTAA). Properly determining the taxable dividends helps you to calculate and pay the right amount of dividend tax.
Foreign Dividend Taxation Process
This is how it works step by step, the foreign dividend income taxation for Indian residents:-
1. Declaration of Dividend – The foreign firm pays a dividend to its shareholders.
2. Withholding at Source – Dividend tax can be withheld at source at the level of the company prior to making the payment.
3. Payment of Dividend – You will be given the net amount after withholding.
4. Reporting in Indian ITR – Report the gross (prior to foreign deduction of tax) as a taxable dividend in your Indian Income Tax Return.
5. Foreign Tax Credit Claim – If the income has already been taxed overseas, claim credit in India to prevent paying double dividend tax.
For example, if you get ₹10,000 as dividend in an American company and the U.S. withholding taxes 25% of it as tax on dividend, you get only ₹7,500. You have to report the entire ₹10,000 in India as dividend tax but can credit ₹2,500 tax withheld in the U.S or Average Tax paid on on such dividend whichever is lower.
Withholding Tax on Foreign Dividends
Withholding tax system allows the source country to tax before dividends are paid out to foreign shareholders. Withholding tax rate varies based on the country's tax law and tax treaty entered into with India.
Examples:
- American dividends: Generally subject to 25–30% withholding tax. Reduced to 15% due to the India-U.S. DTAA.
- British dividends: Generally 10% or 15%, depending on the terms of the treaty.
The withholding tax can be used as a credit to offset your Indian dividend tax liability. The Foreign Tax Credit (FTC) documents being available will allow for such relief to be availed while furnishing ITR.
Double Taxation Avoidance Agreement (DTAA)
India has entered into Double Taxation Avoidance Agreements (DTAAs) with more than 90 nations for double taxation avoidance on the same income. These agreements make provisions for the manner in which dividend tax and taxable dividends must be dealt with.
Tax paid under DTAA can be utilized to set-off against your Indian tax liability but only to the extent of dividend tax payable in India on such income.
For example, if your 15% dividend tax is being deducted by your American company and your Indian slab rate is so much that it is taxed at the rate of 30%, you will pay only the remaining 15% in India after availing credit. If your slab rate is less than this, you would not be required to pay any extra amount.
To avail this advantage, file Form 67 along with evidence of payment of foreign tax while filing your Indian return.
Reporting of Foreign Dividends in Income Tax Return
Foreign dividends are to be reported while filing ITR-2 or ITR-3, as per the nature of income. Here's how to report:
1. Gross Dividend – Report the dividend before foreign deduction.
2. Taxable Dividend – Consider adjustment for exemption or relief under DTAA.
3. Report under 'Income from Other Sources' – State the amount of tax-paying dividends and the associated dividend tax paid overseas.
4. Claim FTC in Form 67 – Submit documentary evidence of payment of withholding tax.
Under-reporting or non-disclosure of foreign dividends is penalizable under the Income Tax Act. Thus, proper and timely reporting of tax-paying dividends is required.
Tax Rate on Dividend on Foreign Income
In India, foreign income dividend is taxed as below based on your residential status and income slab:
- Individuals: Treated at the applicable slab rate (5% to 30%).
- Companies: Treated at corporate tax slab rates (22% or 25% in most cases).
- NRIs: Pay special provisions in the form of relief under DTAA.
There are no concessionary foreign dividend rates in the Income Tax Act. Therefore, the whole taxable dividend forms part of your overall income. Knowing the proper rate and available credits will result in precise calculation of dividend tax payable.
Foreign Exchange Fluctuations Impact
Foreign dividends are typically remitted in a currency other than Indian Rupees (INR). For the purposes of reporting, the dividend has to be converted to INR on the date of receipt at the telegraphic transfer buying rate.
Fluctuation in exchange rates could be applied to your taxable dividend as well as overall dividend tax burden in India. Keeping track of exchange rates, foreign remittance reports, and dividend vouchers prevents inconsistency in reporting.
Tax Planning by Indian Investors
Indian investors can minimize their overall dividend tax liability through tax planning:
1. Enjoy DTAA Benefits: Verify whether there is a treaty between India and the foreign nation. This can sharply curtail withholding and overall dividend tax.
2. Tax Paid Abroad: Submit Form 67 prior to your ITR to claim foreign tax paid as a credit on the taxable dividend.
3. Lower Dividend Withholding Nations: There are countries that have better dividend taxation conditions for Indian residents.
4. Invest at the Right Time: Dividend payment after proper tax years and exchange rates will guarantee maximum net return following dividend tax.
5. Documents in Order: Properly guaranteeing dividend statements, evidence of tax deduction, and Form 67 receipts for verification.
6. Seek Advice from a Tax Professional: Professional guidance assures proper classification of taxable dividends, best possible claims under maximum credit, and complete compliance with Indian dividend tax laws.
Strategic planning prevents you from paying only due dividend tax, double taxation, and maximizing after-tax income.
Conclusion
Foreign dividends are to be taxed in India under the head "Income from Other Sources. "You need to report the amount of taxable dividend before availing any foreign tax credit. Foreign tax withheld on dividend can be off-set against your Indian tax liability under DTAA. You need to report and furnish Form 67 on time to claim credits. Tax planning lightens the dividend tax burden and raises net returns.
Foreign market investment can be highly remunerative for Indian investors, but it is important to understand the intricacies of taxation of foreign dividend income. By reporting taxable dividends in a correct manner, receiving credit for tax on foreign dividend, and following the provisions of DTAA, you can be tax efficient while reaping the benefits of international diversification.