Dividend Income Taxability for NRIs in India: Key Scenarios and Recent Changes
India’s Income Tax Act clearly specifies how Non-Resident Indians (NRIs) must pay tax on dividend income. Since the applicable rules vary depending on the nature and origin of the investment, NRIs must therefore fully understand these differences. First, they should assess whether they purchased their shares using foreign currency; next, determine if they acquired them through Global Depositary Receipts (GDRs); and finally, confirm whether they made the investments in Indian rupees. Furthermore, this understanding not only affects the applicable tax rates but also determines how they must report their dividend income. As a result, having this clarity enables NRIs to comply with tax laws while effectively managing their tax obligations.
Dividend on Shares/Securities Purchased With Foreign Currency (Section 115E)
Applicability
This section applies when NRIs purchase shares, debentures, deposits, or government securities using convertible foreign currency (not Indian rupees).
Foreign Exchange Asset Includes:
- Shares in Indian public company
- Debentures/company deposits in Indian public company
- Securities of Central Government
Tax Rates
- Dividend Income: faces a flat tax rate of 20% plus surcharge and cess.
- Long-term Capital Gains (LTCG) attract a tax rate of 12.5% (previously 10% before 23 July 2024).
- The tax department applies slab rates to other income.
Deductions
NRIs cannot deduct any expenses (such as brokerage or fees) from dividend income.
TDS (Tax Deducted at Source)
- Dividend: The tax department deducts TDS at 20% if the PAN is provided; otherwise, it applies 30%, plus 4% cess.
ITR Disclosure
- First, disclose the gross dividend income in Schedule OS.
- Then, enter the income under Section 115E at the 20% rate in Schedule SI.
DTAA Relief
If the NRI’s country has a double taxation avoidance agreement (DTAA) with India, submitting Form 10F and a Tax Residency Certificate can lower the tax rate on dividend income.
Dividend Income from Global Depositary Receipts (GDRs) (Section 115AC)
Applicability
Section 115AC provides a concessional tax rate for Global Depositary Receipts (GDRs) of Indian companies or PSUs purchased by NRIs through foreign exchanges.
What is Global Depositary Receipts (GDRs):
GDRs represent shares of Indian companies but trade internationally on exchanges such as NYSE or London Stock Exchange. They allow investors worldwide to buy Indian company shares without trading directly in India.
GDRs Features:
- International securities traded on NYSE/London/other foreign exchanges
- Issued against shares of Indian companies/Public Sector Units
Tax Rates:
- Dividend income on GDRs faces a flat tax of 10% plus cess.
- The tax rate on LTCG from GDRs has been set at 12.5% (previously 10% before 23 July 2024)
- No deductions are allowed from the dividend income of GDRs.
TDS
- Dividend on GDRs: TDS at 10% plus 4% cess.
ITR Disclosure
- Schedule OS: Disclose gross GDR dividend income.
- Schedule SI: Enter under Section 115AC for dividend from GDRs at 10% rate.
DTAA Relief
Most DTAAs do not offer rates lower than 10%, so Section 115AC usually provides the most beneficial tax rate.
Dividend Income from Shares Purchased in Indian Rupees (Section 115A)
Applicability
NRIs who buy shares on Indian exchanges with Indian rupees or those who became NRIs after investing in Indian shares.
Taxability
- Dividend Income: is taxed at a flat 20% rate, plus surcharge and cess, regardless of the total income.
- No slab benefits or basic exemptions apply.
TDS
- Dividend: TDS at 20% (with PAN), 30% (no PAN), plus 4% cess.
ITR Disclosure
- Schedule OS: Disclose gross INR dividend income.
- Schedule SI: Enter under Section 115A(1)(a)(i), with 20% rate.
DTAA Relief
Submission of Form 10F and Tax Residency Certificate can reduce the rate, usually to 10–15%.
Transitional Status
If shares were acquired as a resident and the status changed to NRI, dividends are taxed as per Section 115A, unless the shares were purchased using foreign currency.
Other important points:
Whats the TDS Rate When PAN Not Available
When you do not provide your PAN (Permanent Account Number) to the dividend-paying company, the Tax Deducted at Source (TDS) automatically increases to 30%. This higher rate is a penalty imposed by the tax department to force NRIs to register with the tax system and maintain proper documentation. Adding the 4% Health and Education Cess, the effective TDS rate becomes approximately 31.2% without PAN.
Is Slab Rate Benefit Given?
There is no slab rate benefit for any type of NRI dividend income. Across all three scenarios—foreign currency shares, GDRs, and rupee shares—dividend income is taxed at fixed flat rates without any consideration of your total annual income.
Are Deductions Allowed?
NO deductions are allowed. This applies uniformly across all three dividend income scenarios: foreign currency shares, GDRs, and rupee shares. The dividend income is always taxed on a “gross basis” without any reduction for expenses. Additionally, deductions under Chapter VI-A of the Income Tax Act cannot be set off against dividend income. This means investments in Public Provident Funds (PPF), Equity Linked Saving Schemes (ELSS), National Pension Schemes (NPS), life insurance premium payments, and other specified tax-saving instruments cannot reduce your taxable dividend income.
How To Show This In Return?
First, you navigate to Schedule OS (Other Sources) in your ITR-2 form and locate Item 1(a) labeled “Dividends, Gross”. In this field, you must enter the complete gross amount of dividend received before any TDS was deducted.
Second, and this is the most important step that many NRIs overlook or get wrong, you must go to Schedule SI (Statement of Income Chargeable at Special Rates) and add a new entry. This Schedule SI entry is absolutely crucial because without it, the tax computation system might not apply the correct special flat rate to your dividend income.
