My wife and I have been regularly investing in equity for more than 25 years and our portfolio has been in joint name from day one. We acquired these shares through income earned during our stay outside India as NRIs, and, in addition, remittances were made through the joint NRE account under NRE PINS (Portfolio investment NRI Scheme) and Non-PINS. We returned to India for good in 2011. As per RBI regulations, we moved our joint NRE PINS and non-PINS portfolio to joint resident demat and bank accounts. At present, we get approximately ₹0.50 million (₹5 lakh) every year as dividend income from this portfolio. Till now, despite both of us having filled tax returns regularly, the dividend income and long-term capital gains from this account has been declared as only my income in ITR as these were exempted and tax-free income, respectively.

As you are aware, from April 1, 2018, LTCG has been implemented and furthermore dividend income is going to be taxed from April 1, 2020. Hence, from now on, is it advisable to equally divide dividend income as well as LTCG and declare it separately in our respective ITR?

MC Muthaiya

As per Section 112A of the Income Tax Act introduced by Finance Act 2018 (effective April 1, 2018), LTCG arising from the sale of equity shares of a company or units of an equity-oriented fund (exceeding ₹1 lakh) is taxable at 10 per cent, which is computed without giving benefit for cost inflation index.

Earlier, the same was exempt u/s 10(38) of the I-T Act subject to payment of securities transaction tax (STT).

As per Section 115BBDA of the I-T Act, if a resident individual receives dividend income exceeding ₹10 lakh (declared/ distributed/ paid by a domestic company) on or before March 31, 2020, such dividend income is taxable at 10 per cent.

Further, as per changes in the Finance Act, 2020, dividend distribution tax (DDT) has been abolished from FY2020-21 and any dividend income received on or after April 1, 2020, shall become taxable in the hands of the recipient, and tax will be required to be paid at the applicable slab rate (irrespective of amount received).

We presume that you and your wife have made investments in the joint portfolio out of your respective incomes. In light of the provisions discussed above, any income arising in the nature of LTCG /dividend from such investment shall become taxable and would be required to be reported in the return of income, in proportion to original investments.

Please note that the primary essence for taxability of the resulting income should be based on the source of investments made. If the investment has been done (ie, initially or now) from funds owned only by you, the entire income (dividend/ LTCG, as the case may be) should be taxable in your hands and accordingly reported in the income tax return filed by you. Alternatively, if you and your wife have jointly invested in the portfolio, the resultant income would be required to be divided proportionately on the basis of actual investment made by you and your wife. Accordingly, the same will be taxable in your respective hands and will also be required to be reported in the return of income.

You mentioned you have been reporting the exempt dividend income/exempt capital gains in your tax return since 2011. The Tax Department may raise queries to explain the source of investments, especially if the reporting is changed on the basis of the proportion of investments made as against the income/gains in your tax return as done in the earlier years.

You may also note that w.e.f. April 1, 2020, a company paying dividend (exceeding ₹5,000) would now be required to withhold tax at 10 per cent on such dividend.

Credit of taxes withheld by the company would be claimed in your/your wife’s tax return (as appropriate).

The writer is a practising chartered accountant. Send your queries to taxtalk@thehindu.co.in

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