Tax on dividends earned abroad

1. Section 10 of the Income Tax Act, 1961 provides for Incomes which do not form part of Total Income. Section 10 (34) of Income Tax Act, 1961 provide exemption to income received by way of dividend only from a domestic company in the hands of the recipient, however all income received by way of dividend from a foreign company is liable to be taxed in India.Therefore, Dividend received from foreign Company is taxed under the head "Income from other sources" under the Indian Income Tax Act of 1961.

2.Relevant provisions of the said DTAA need to be examined to determine taxation of Dividend Income received by an Indian Individual from a Foreign Company. Usually many DTAA's contain a provision of Withholding tax (i.e. tax deducted at source) on dividend incomes. The rate of tax on such dividends in many cases is 15%.

3.In the above mentioned case, where tax is levied in both the countries, in respect of the same dividend income, DTAA between India and the other country provides relief from effect of such Double taxation. As per the provisions of the DTAA, Indian individual will get a deduction on the Tax already deducted in such other country on such dividend Income. Therefore it can be concluded that though the dividend income received by an Indian Individual from investment of shares in a Foreign Company will be included in his "Total Income" (i.e. Section 5) and is taxable in India, tax already paid in the foreign country on such dividend income will be deducted from tax calculated on such dividend income in India