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).
Current Rules (Post‑Budget 2025 / as on 1 April 2025 onward)
Here are all the important rules in effect now for taxing dividend income.
| Aspect | What’s the Rule Now |
|---|---|
| TDS (Tax Deducted at Source) on dividend payments to resident Indian shareholders | A company (or entity making dividend payment) must deduct TDS at 10% on dividend income if the dividend paid (or aggregate of dividends during the financial year) exceeds ₹10,000 to a shareholder who is an individual. This replaces the earlier threshold of ₹5,000. |
| Threshold for TDS exemption | If dividends paid/aggregated in the year do not exceed ₹10,000, no TDS is required. |
| Tax treatment of the dividend income in hands of recipient (Resident) | Dividend income must be included under “Income from Other Sources” (or relevant head) in the recipient’s total income and taxed as per their marginal slab rate. There is no special low rate just because it's dividend (unlike earlier when DDT was there). |
| Non‑resident shareholders | For non‑residents receiving dividend from Indian companies, TDS is levied at 20% (plus applicable surcharge and cess), or the rate specified in the applicable Double Taxation Avoidance Agreement (DTAA), whichever is lower. |
| Deduction of expenses related to earning dividend income | Under Section 57 of the Income Tax Act, recipients can claim deductions for certain interest expenses incurred in connection with earning dividend income. The deduction is capped at 20% of gross dividend income. This remains applicable. |
| Advance tax obligations | If you are liable (i.e., dividend income plus other income results in tax liability beyond certain thresholds), you may need to pay advance tax on your total estimated income, which includes dividend income. Failure to pay may attract interest/penalties. (This follows general income‑tax advance payment rules.) |
Frequently Asked Questions
1. Are dividends subject to tax in India?
Yes, dividends are taxable in the hands of the shareholder under the Income Tax Act. The tax is levied as per the applicable income tax slab rate.
2. What is the rate of TDS on dividends?
A 10% Tax Deducted at Source (TDS) is deducted on dividends if the total dividend income exceeds ₹5,000 in a financial year. For non-residents, the TDS rate may be higher, depending on DTAA agreements.
3. Do I have to pay tax on dividends if my total income is below ₹2,50,000?
No, if your total taxable income is below ₹2,50,000, you are not liable to pay tax on your dividend income. However, if TDS is deducted, you can file for a refund.
4. Can I avoid TDS on dividend income?
Yes, you can submit Form 15G or 15H (for individuals below 60 years and senior citizens) to ensure no TDS is deducted if your total taxable income is below the basic exemption limit.
5. What is the tax rate on foreign dividends?
Foreign dividends are also taxed at the applicable income tax slab rate, and a Foreign Tax Credit can be claimed if tax has already been paid in the foreign country.
6. How are dividends from mutual funds taxed?
Dividends from mutual funds are taxed as per your applicable income tax slab. TDS is applicable if your annual dividend income exceeds ₹5,000.
7. Is dividend income from REITs taxed differently?
Yes, dividends from REITs are subject to 10% TDS, and are taxed at the individual’s applicable income tax slab.
8. Is dividend income taxable under the new tax regime?
Yes, dividend income is taxable even under the new tax regime. The only difference is that you will not be allowed to claim any exemptions or deductions while opting for the new tax regime.
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Official Income Tax Return filing website: https://incometaxindia.gov.in/
