Dividends are payments made by a company from its profits to shareholders. Dividend payment is a way of rewarding investors for holding shares of the company. Dividends can be paid either in cash or in the form of additional shares.
Dividend investing can play a significant role in an investor’s wealth creation journey as a source of income. It’s a motivating element for new investors. A few years back, when technology drove most of the stock market, dividend was one of the most important considerations for amateur investors.
Investors should consider a few important elements before going into this world of dividend-paying stocks:
- Growth Expectations: Although dividend stocks provide consistent income, they might not necessarily experience rapid growth. Remember that some of the fastest-growing businesses decide against paying dividends in favour of reinvesting their revenue.
- Stability and Income: Dividend-paying stocks can be a wise investment if you’re looking for a steady stream of income. These stocks are perfect for long-term investors seeking steady profits because they are frequently linked to well-established businesses that have attained a certain level of stability.
- Goal Establishing: Clearly defining your investment objectives is essential. Establish the annual returns you hope to achieve then select equities that will help you reach those goals. Aim for a balanced portfolio with an annual growth rate of 5% to 15%, balancing potential capital appreciation with dividend income.
By considering the above factors thoughtfully, you can navigate the world of dividend investing with confidence and set yourself up for long-term financial success.
Also Read: What are Bonus Shares, cherry on top of your investment sundae?
Classification of Dividend
Dividends are classified into two groups: Qualified and Ordinary.
Qualified Dividend: For investors looking to reduce their tax rate, qualified dividends are the ideal solution. The dividend must originate from an Indian firm or a foreign company that is listed on an Indian stock exchange in order to be eligible. Additionally, stockholders must retain their shares for more than a year prior to the record date, and it must be announced after April 1, 2020.
Ordinary dividends: These are taxed as ordinary income. These dividends may originate from overseas businesses that aren’t traded on Indian markets or from Indian businesses that were operating before April 1, 2020. Shareholders who haven’t held onto their shares for the entire year are also eligible to get them.
Dividend Investing: Taxation of Income
It depends on the type of dividend and the holding period of the shares.
Taxation of Qualified Dividend
Section 115BBD of the Income Tax Act, 1961 provides a flat rate of 10% (plus surcharge and cess) on qualifying dividends. This tax is deducted at source by the company before paying the dividend to the shareholder. There is no additional tax that the shareholder must pay on dividend income.
Section 115BBDA of the Income Tax Act, 1961 requires a shareholder to pay an extra tax of 10% (plus surcharge and cess) if their total dividend income for the financial year exceeds Rs 10 lakh.
Taxation of Ordinary Dividend
Under Income Tax Act of 1961, Section 56(2)(i), an ordinary dividend is taxed at the regular slab rates applicable to the shareholder’s income. The company does not deduct any tax at source from the dividend payment. In order to pay taxes on dividend income, the shareholder must include it in their income tax return.
However, under Section 194 of the Income Tax Act, 1961, a shareholder is required to pay tax deducted at source (TDS) of 10% (plus surcharge and cess) if the total dividend income received by the shareholder in a financial year exceeds Rs 5,000. The shareholder may include the TDS as a credit on their income tax return.
Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before making any investment decision.
