Important keyword: Dividend Income, Income from Other Sources, Income Tax.
Table of Contents
Tax on Dividend Income
Dividends serve as a means for companies to share their profits with shareholders, essentially rewarding them for their investment in the company. These payouts are akin to bonuses for investors who have placed their trust and capital in the company’s endeavors. By distributing dividends, companies demonstrate their appreciation for shareholders’ loyalty and confidence.
For shareholders, dividends represent more than just financial gains; they provide a steady source of income, adding value to their investment portfolio. Moreover, dividends often signify the financial health and stability of the company, reassuring investors of its ability to generate profits consistently.
What is Dividend Income?
A dividend represents a company’s way of sharing its profits with shareholders, distinct from interest payments. Unlike interest, which is paid at regular intervals, dividends are distributed by companies only when they deem it appropriate, usually during profitable periods.
Companies typically allocate dividends to shareholders on a regular basis, often quarterly or annually. This dividend income is separate from any capital gains arising from fluctuations in the stock’s price, making it a distinct benefit for investors who choose dividend-paying stocks.
Dividend income can be sourced from various avenues:
- Investments in shares of domestic or foreign companies.
- Equity or debt mutual funds provided the dividend option is selected.
Tax on Dividend Income
Dividend income earned by taxpayers is subject to taxation based on their applicable income tax slab rates. Furthermore, taxpayers must disclose this income in their Income Tax Returns (ITR) under the “Income from Other Sources” category. This tax treatment remains uniform regardless of whether the dividends are received from domestic or foreign companies.
TDS Applicability
The companies, or payers, are required to deduct Tax Deducted at Source (TDS) under section 194 for securities and under section 194K for mutual funds, as per the prescribed rates:
Assesses | TDS Rates |
Resident | 10% |
Non-Resident | 20% |
For non-resident Indians (NRIs), the 20% Tax Deducted at Source (TDS) rate is subject to the Double Taxation Avoidance Agreement (DTAA). To avail of reduced tax deductions, non-residents should furnish supporting documents such as Form 10F or proof of beneficial ownership and tax residency. Failure to provide these documents may result in higher TDS deductions, which can be reclaimed during Income Tax Return (ITR) filing.

Deduction of Eligible Expenses
If an individual has taken a loan for investing in the stock market, they can offset the interest paid on the loan against dividend income. However, the deduction for interest expense is capped at 20% of the total dividend income. Moreover, no other expenses, such as commissions or salaries, are eligible for deduction.
For instance, let’s consider Mr. Raj, who borrowed money to invest in the share market and paid an interest of INR 2,000. In the same year, he received a dividend of INR 7,000. In this scenario, he can claim the interest amount, but it cannot exceed 20% of the dividend income, which equals INR 1,400 (7,000 * 0.2). Consequently, the taxable dividend will be INR 5,600 (7,000 – 1,400).
Read More: Income Tax on winning lottery, crossword puzzles, game shows, horse race
Web Stories: Income Tax on winning lottery, crossword puzzles, game shows, horse race
Official Income Tax Return filing website: https://incometaxindia.gov.in/