Dividend Income Taxability for NRIs in India: Key Scenarios and Recent Changes
India’s Income Tax Act defines specific rules for taxing dividend income earned by Non-Resident Indians (NRIs), based on how and where the investment was made. Understanding these rules—and how they differ for shares purchased with foreign currency, Global Depositary Receipts (GDRs), or with Indian rupees—is critical for NRIs.
Dividend on Shares/Securities Purchased With Foreign Currency (Section 115E)
Applicability
Section 115E applies when NRIs purchase shares, debentures, deposits, or government securities in India 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
Taxability
- Dividend Income: Taxed at a flat rate of 20% (plus applicable surcharge and cess)
- Long-term Capital Gains (LTCG): Taxed at 12.5% (before 23.7.24 its 10%)
- Other Income: Taxed at slab rates (if it doesn’t qualify above).
No deductions are allowed for expenses (brokerage, fees) from dividend income.
TDS (Tax Deducted at Source)
- Dividend: TDS at 20% (if PAN is provided), 30% (if no/invalid PAN), plus 4% cess.
ITR Disclosure
- Schedule OS: Disclose gross dividend income.
- Schedule SI: Enter under Section 115E at 20% rate (Special Income).
- Non-investment income (e.g., salary) should be reported separately in ITR and taxed under regular slabs.
DTAA Relief
If the NRI’s country has a double-taxation treaty (DTAA) with India, applying for Form 10F and a Tax Residency Certificate can reduce the applicable tax rate on dividend income.
Dividend Income From 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):
A Global Depositary Receipt (GDR) is basically a certificate that represents shares in a foreign company (in this case, an Indian company) that’s traded on international stock exchanges. Think of it as a wrapper or packaging that allows investors worldwide to buy shares of an Indian company without having to trade directly in India.
GDRs Features:
- International securities traded on NYSE/London/other foreign exchanges
- Issued against shares of Indian companies/Public Sector Units
Taxability
- Dividend Taxed at a flat rate of 10% (plus cess).
- Long-term Capital Gains (LTCG): Taxed at 12.5% (before 23.7.24 its 10%)
- No deductions for expenses allowed from dividend GDR income.
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 generally provides the most favorable rate.
Dividend Income From Shares Purchased in INR (Section 115A)
Applicability
Section 115A applies to NRIs earning dividend income from shares purchased in Indian Rupees (INR) on Indian exchanges, OR who invested while resident, later becoming an NRI.
Taxability
- Dividend Income: Taxed at a flat 20% rate (plus surcharge and cess, regardless of total income).
- No slab-rate or basic exemption applies—flat rate is mandatory.
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
Providing Form 10F and Tax Residency Certificate can reduce tax rate to DTAA limits, most often 10–15%.
Transitional Status
If you acquired shares as a resident, then became an NRI, dividends are taxed as per Section 115A, unless the shares were purchased via 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.
