How is dividend income taxed for NRIs?

—Name withheld on request

Effective financial year 2020-21, dividend income from shares of an Indian company is taxed in India. In the case of a shareholder who qualifies as a ‘non-resident’ in India under the Indian Income Tax Law, dividend income is taxable at 20% plus applicable surcharge and 4% health and education cess on gross basis. Thus, the tax rate applicable to dividend income for a non-resident ranges between 20.8% and 28.5% depending on the level of total income and the applicable surcharge.

In case of a shareholder who qualifies as a “resident” in India, the dividend income is taxable at the applicable slab rates.

The benefit can be traced under Double Taxation Avoidance Agreement (DTAA) between India and another country to avoid double taxation or to get a lower rate of tax. The Indian company shall withhold tax on dividends at a rate under either (a) 20% plus applicable surcharge and 4% health and education cess or (b) DTAA, whichever is lower. For the application of the lower DTAA rate, the non-resident shareholder must submit a tax residence certificate of the other country to establish eligibility to claim DTAA benefits.

My son is living abroad. His Public Provident Fund account matured in April 2022 and the proceeds were credited to his Non-Resident Ordinary (NRO) account. How much money can be transferred to him in this financial year?

—Name withheld on request

Under the exchange control law, funds can be transferred outside India from an NRO account, subject to an aggregate limit of $1 million per financial year (April-March), subject to documentation requested by the bank.

Sonu Iyer is EY India’s Tax Partner and People Advisory Services Leader.

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