When a company declares its earned profits in its quarterly results, it may give a share of its earnings to the shareholders. The share is proportional to the number of shares owned by the individual. This is known as a dividend. A company pays a dividend to make stocks appealing to investors and to retain them.
Important Dividends Dates
Below are a few important dates to note:
- Declaration Date
It is the date when the company declares the dividend. It includes dividend amount, ex-dividend date and payment date.
2. Record Date
It is the date by which the company must record an investor. Only shareholders on the record are entitled to a dividend payment. To be eligible to be added to the company’s book, it is essential to buy stocks at least two days before the record date.
3. Ex-Date
This is usually before the record date. If you purchase shares on or after the ex-date, you are not eligible to receive dividends. Indian stock exchanges determine the ex-date.
4. Payment Date
This is usually a month from the record date. The declared stock dividends are paid out on the Payment Date.
How is dividend payout calculated?
The dividend payout is the ratio of annual dividend per share with the net income of the company. For instance, if the dividend is 10 per share and you have 100 shares, you will receive a dividend of 1000. The dividend payout is received in 2 business days.
When Are Dividends Paid Out?
When dividends are paid, the company first transfers the funds to the Depository Trust Company (DTC) on the payment date. The DTC then sends the cash payments to brokerage firms worldwide where shareholders have their accounts. These brokerage firms credit the cash dividends to the shareholders’ accounts or reinvest them according to the shareholders’ instructions. If shareholders receive their dividends by mail, the checks should arrive within a few days after the payment date. This process ensures that shareholders receive their dividends efficiently, either directly into their brokerage accounts or through mailed checks.
What Is a Dividend Reinvestment Plan (DRIP)?
A Dividend Reinvestment Plan (DRIP) provides several benefits to investors. By automatically reinvesting dividends, investors can easily grow their equity holdings without the hassle of manually purchasing more shares. Company-operated DRIPs are typically commission-free, making them especially attractive to small investors who face proportionally higher fees for small stock purchases. Additionally, some companies allow investors to buy extra shares at a discounted rate, ranging from 1% to 10%, further enhancing the value. This discount, combined with the elimination of commission fees, enables investors to accumulate stock more cost-effectively compared to buying through a brokerage.
Tax Implications of Dividends
The Finance Act, 2020 introduced a tax deduction at source (TDS) on dividends distributed by companies and mutual funds starting April 1, 2020. The standard TDS rate is 10% on dividend income exceeding ₹5,000. However, as a COVID-19 relief measure, this rate was temporarily reduced to 7.5% from May 14, 2020, to March 31, 2021. Taxpayers can credit the deducted TDS against their total tax liability when filing their income tax return (ITR). For example, if Mr. Ravi receives a ₹6,000 dividend on June 15, 2023, a 10% TDS (₹600) will be deducted, leaving him with ₹5,400. This dividend income is taxable according to the applicable tax slabs for FY 2023-24. For non-residents, the TDS rate is 20%, subject to double taxation avoidance agreements (DTAA). To benefit from a lower treaty rate, non-residents must provide documents like Form 10F and a tax residency certificate; otherwise, a higher TDS will apply, which can be claimed during ITR filing.
How is a dividend paid out?
The dividend can be paid out monthly, quarterly, semi-annually, or annually. Sometimes, there is no set schedule for payouts, and if the company is making exceptional profits, it can also give out special one-time dividends. The payout can be in the form of cash or additional stocks. The dividends can be used to repurchase shares in the open market. The dividend cheque is usually credited to your bank account.
In some cases, the cheque is mailed to you. The interest earned from dividends is taxable. You can earn a steady, regular income with dividends. Get started with an Angel One trading account now.
Conclusion
Dividends serve as a means for companies to reward shareholders with a portion of their profits, although not all companies opt to pay them. Once a company declares dividends and sets key dates, shareholders eligible by the ex-date receive payments on the designated payment date. Shareholders have the flexibility to receive dividends either in cash or as additional shares, depending on their preference. Understanding when dividends are paid, how they are distributed, and how to receive them ensures investors can effectively manage their investment income and make informed decisions regarding their portfolio.
FAQs
When are dividends paid out?
Dividends are paid out on the payment date, usually a month after the record date, to shareholders who owned the stock by the ex-date.
What is a Dividend Reinvestment Plan (DRIP)?
A DRIP allows investors to automatically reinvest dividends to purchase additional shares, often at a discounted rate, without incurring commission fees.
What are the tax implications of dividends?
Dividends are subject to TDS (Tax Deducted at Source) at rates like 10% for residents and 20% for non-residents, with options to credit TDS against total tax liability.
How are dividends paid to shareholders?
Dividends are paid directly into shareholders’ brokerage accounts or through mailed checks, arriving shortly after the payment date.
