You might question if you invest in stocks or mutual funds that let you reinvest dividends instead of getting them as cash: Do I still have to pay tax? The response is certainly yes. Knowing taxes on reinvested earnings helps you better manage your investments and minimize uncertainty on tax filing. Let us dissect it simply here.
What are dividends reinvested in?
Reinvested dividends are those whereby the sum utilized to purchase new units or shares automatically replaces the payout as cash. Mostly, this occurs under mutual fund dividend reinvestment programs. Though it’s taxed and your income is still cash, you cannot see it.
Taxable Reinvested Dividends
Sure. The year the dividend is declared treats it as income even if you do not get it in hand. Taxes on reinvested dividends thus apply the same way as those on ordinary dividends. Payable under “Income from Other Sources.”
- Taxed at your slab rate: 5%, 20%, 30%
- Not specifically exempt for reinvested money.
For instance, you get ₹10,000 dividend under the reinvestment plan: Though it increases your revenue, it is not cash seen in your account. If your tax slab is 20%, tax is ₹2,000. Though it was reinvested, you have to disclose it and pay taxes.
Regarding TDS?
TDS @ 10% is deducted if the entire dividend—cash or reinvested—from one firm or mutual fund comes out to be more than ₹5,000 in a financial year. Form 26AS or AIS lets you view this. Claim this TDS as you submit your ITR.
How does one document reinvested dividends in ITR under “Income from Other Sources”?
- Use ITR-1 or ITR-2 based on your income category.
- Match your revenue to AIS and broker statements.
- Don’t skip it; even if you didn’t get cash.
Capital Gains on Reinvested Units
Capital gains tax later on when you sell the reinvested units also counts: Right now you pay dividend tax. Later on, you pay capital gains tax on the additional units reinvested in. If not well-planned, you might experience double taxes.
Finally
Though you never see the money, taxes on reinvested dividends follow the same rules as those on ordinary dividends. Track them, document them, and pay taxes right. To prevent future problems, always review your mutual fund or stock dividend statements and keep your tax files neat.