What are the tax implications of dividends?

Dividends are subject to TDS (Tax Deducted at Source) at rates like 10% for residents and 20% for non-residents, with options to credit TDS against total tax liability.

How are dividends paid to shareholders?

Dividends are paid directly into shareholders' brokerage accounts or through mailed checks, arriving shortly after the payment date.

When are Stock Dividends Paid Out

Q: When are dividends paid out?

Dividends are paid out on the payment date, usually a month after the record date, to shareholders who owned the stock by the ex-date.

Q: What is a Dividend Reinvestment Plan (DRIP)?

A DRIP allows investors to automatically reinvest dividends to purchase additional shares, often at a discounted rate, without incurring commission fees.

When a company declares its earned profits in its quarterly results, it may give a share of its earnings to the shareholders. The share is proportional to the number of shares owned by the individual. This is known as a dividend. A company pays a dividend to make stocks appealing to investors and to retain them.

Key Takeaways

Dividends are paid on the payment day, which is usually one month after the record date established by the company.

To qualify for dividend payments under India's T+1 settlement cycle, shareholders must acquire shares at least one day before the Record Date.

Dividends are either credited immediately to broking accounts or sent to shareholders in accordance with their specified preferences.

Resident investors pay 10% TDS on dividend income above ₹5,000, whereas non-residents pay 20% TDS, according to DTAA regulations.

What Is a Stock Dividend Payment Date?

The stock dividend payment date is the date on which the company pays out the declared dividend to qualified shareholders. It occurs after the declaration date, record date, and ex-date and is determined by the company's board of directors when the dividend is declared. Only shareholders who owned the shares prior to the ex-date receive the dividend on this date. On the payment date, the corporation sends money to the depository, which subsequently transmits the cash to brokers for crediting shareholders' accounts. The dividend can be received online or in the form of a physical check, depending on the method selected.

Important Dividend Dates

Below are a few important dates to note:

1. Declaration Date

It is the date when the company declares the dividend. It includes dividend amount, ex-dividend date and payment date.

2. Record Date

It is the date by which the company must record an investor. Only shareholders on the record are entitled to a dividend payment. To be eligible to be added to the company’s book, it is essential to buy stocks at least two days before the record date.

3. Ex-Date

This is usually before the record date. If you purchase shares on or after the ex-date, you are not eligible to receive dividends. Indian stock exchanges determine the ex-date.

4. Payment Date

This is usually a month from the record date. The declared stock dividends are paid out on the Payment Date.

How is dividend payout calculated?

The total dividend you receive is calculated by multiplying the Dividend Per Share (DPS) by the number of shares you hold on the Record Date.

Example:

Dividend Declared: ₹10 per share

Shares Held: 100

Total Payout: 100 x ₹10 = ₹1,000

This amount is credited to your bank account typically within 30 days of the declaration (for interim dividends) or AGM (for final dividends).

When Are Dividends Paid Out?

On the payment date, the company (or its Registrar and Transfer Agent - RTA) processes the dividend payout.

Electronic Transfer: For most investors, the dividend is credited directly to the primary bank account linked to their Demat account via NECS/NACH.

Physical Instrument: If bank details are missing or incorrect, a Dividend Warrant or Demand Draft is mailed to the registered address.

Unlike some international markets where dividends might go to the brokerage account, in India, the money usually lands directly in your savings bank account.

What Is a Dividend Reinvestment Plan (DRIP)?

A Dividend Reinvestment Plan (DRIP) provides several benefits to investors. By automatically reinvesting dividends, investors can easily grow their equity holdings without the hassle of manually purchasing more shares. Company-operated DRIPs are typically commission-free, making them especially attractive to small investors who face proportionally higher fees for small stock purchases. Additionally, some companies allow investors to buy extra shares at a discounted rate, ranging from 1% to 10%, further enhancing the value. This discount, combined with the elimination of commission fees, enables investors to accumulate stock more cost-effectively compared to buying through a brokerage.

Note: While Dividend Reinvestment Plans (DRIPs) are common in international markets and Mutual Funds (IDCW Reinvestment option), for direct equity stocks in India, dividends are typically paid out as cash to your bank account. To 'reinvest,' investors usually have to manually use that cash to buy more shares from the market.

Tax Implications of Dividends

The Finance Act, 2020 abolished the Dividend Distribution Tax (DDT) and made dividends taxable in the hands of investors.

TDS Rate: A 10% TDS is deducted if the total dividend paid to a resident shareholder exceeds ₹5,000 in a financial year.

Tax Slab: The dividend income is added to your total income and taxed according to your applicable income tax slab rates.

Non-Residents: For NRIs, the TDS rate is generally 20% (plus surcharge and cess), subject to Double Taxation Avoidance Agreements (DTAA).

Form 15G/15H: Investors with no taxable income can submit Form 15G (or 15H for seniors) to the company to avoid TDS deduction.

Read more about What is Tax Deducted at Source?

How is a dividend paid out?

The dividend can be paid out monthly, quarterly, semi-annually, or annually. Sometimes, there is no set schedule for payouts, and if the company is making exceptional profits, it can also give out special one-time dividends. The payout can be in the form of cash or additional stocks. The dividends can be used to repurchase shares in the open market. The dividend cheque is usually credited to your bank account.

In some cases, the cheque is mailed to you. The interest earned from dividends is taxable. You can earn a steady, regular income with dividends.

Conclusion

Dividends serve as a means for companies to reward shareholders with a portion of their profits, although not all companies opt to pay them. Once a company declares dividends and sets key dates, shareholders eligible by the ex-date receive payments on the designated payment date. Shareholders have the flexibility to receive dividends either in cash or as additional shares, depending on their preference. Understanding when dividends are paid, how they are distributed, and how to receive them ensures investors