Introduction

Dividends are your share of the company's profits, and dividends further enhance your investment returns. As you invest in US stocks using a reputable broker like Motilal Oswal, you will see that there are also different tax treatment amounts on your dividend payments. Understanding the various entities you will be investing in and the differences between ordinary and qualified dividends is essential. It is necessary to understand the differences to calculate how much you will have to pay in tax on your dividend income and what your overall dividend income is. Review how dividends are taxed and what that means for you as the taxpayer.

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What is a Dividend?

Dividends are payments made to shareholders that are part of the business's profits. They are usually paid on a per-share basis and will usually fluctuate based on company performance. Whether you are investing in US companies or companies worldwide, dividends are a meaningful source of income and represent a vastly different tax treatment that may affect your overall returns.

Ordinary vs. Qualified Dividends

Dividends are categorised as ordinary or qualified. An ordinary dividend is a standard taxed at the normal income tax rates. On the other hand, qualified dividends receive a special lower tax rate called capital gains. Given these tax differences, qualified dividends are more tax-efficient. This classification distinction is essential for you, as an Indian investor, when investing in the US markets, as it may impact your after-tax income.

Two Things to Consider

There are both dividend eligibility requirements and some holding period requirements. The dividend must have originated from either a US corporation or a foreign corporation that trades on a major US stock exchange like the NYSE. You must hold the security for 61 of the 120 trading days surrounding the ex-dividend date. Securities you hold based on receipt of a tax-exempt organisation dividend or assets held in a specific employee stock purchase plan are ineligible for qualified dividend status. Other than taxes, ordinary and qualified dividends are generally paid similarly. As indicated previously, the tax savings make a difference.

Tax Rates Explained

Ordinary Dividend Taxation

In the United States, regular dividends count as taxable income for you, which is taxed at federal tax rates of anywhere from 10% to 37%, depending on which income tax bracket you are in. For example, for someone in a higher tax slab, the taxes will increase on these dividends, meaning you will take home less of your overall income.

Qualified Dividend Tax Rates

Qualified dividends are taxed at long-term capital gains tax rates of 0%, 15% or 20%. For example, for a single filer in 2025, the long-term capital gains tax rates apply at the following threshold: 0% for income below $48,350, 15% for income between $48,351 - $533,400, and 20% for income above $533,400. The thresholds for married couples filing jointly are higher: 0% for income below $96,700, 15% for income between $96,701 - $600,050, and 20% for income above $600,050.

Additional Tax Considerations

If your income exceeds $200,000 (single) or $250,000 (joint filers), you may be subject to a 3.8% Net Investment Income Tax on qualified dividends. The dividend tax is easy to calculate, multiply the dividend dollar amount by any applicable rate. For example, $10,000 of ordinary dividends at 24% means $2,400 in taxes, and qualified dividends at 15% means $1,500 in taxes; therefore, the tax savings are $900.

Implications for Investors from India

US Withholding Tax

As an investor from India, you will face a 25% US withholding tax on dividends as per the India-US treaty, provided you filled out Form W-8BEN. Your dividends in India will be taxed as "income from other sources" and taxed at your slab rate (up to 30% plus surcharges). You can claim a tax credit for the taxation in the US, enabling you to offset your Indian tax liability.

Double Taxation

You will not be double-taxed when you invest in US dividend-paying stocks from India because, after claiming the tax credit for the US tax paid, your Indian tax liability should be reduced to zero (if your tax on dividends is less than the 30% limitation you face). The qualified vs. ordinary distinction will have significant implications for US residents, but in some cases, it may also give you an advantage regarding the treaty benefits.

Example Calculation

Let's say you receive $20,000 in ordinary dividends. The US withholds $5,000 (25%) in tax. You would owe $6,000 at the 30% slab in India, but you can claim the $5,000 to reduce your Indian tax to $1,000. The process for qualified dividends is similar because withholding rates for non-residents do not vary by dividend type.

Optimising for Qualified Dividends

Focus hard on obtaining qualified dividends to remodel your choices of exempting taxes as best as possible by meeting their holding period and others. You can also use a tax-advantaged account and defer your tax over time. It is also good to consult a tax professional to help you maintain compliance under both US and Indian tax law.

Conclusion

Now you know how ordinary and qualified dividends impact your taxable income. Earning lower tax rates on qualified dividends can result in better investment returns. Understanding treaty provisions can also help to enhance the tax relief rate. Knowledge is power, so go out and make your investments work for you.

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