How Dividends Are Taxed in India (FY 2025-26)

Short answer: Since 1 April 2020, dividend income is taxable in the hands of the shareholder at their applicable income tax slab rates. The previous system of Dividend Distribution Tax (DDT) paid by companies has been abolished. Companies are now required to deduct Tax at Source (TDS) at 10% on dividends paid to resident individuals if the amount exceeds ₹5,000 in a financial year.

What changed in dividend taxation after 2020?

The primary change is the shift in the point of taxation from the company to the shareholder. Before Finance Act 2020, Indian companies paid a Dividend Distribution Tax (DDT) on profits distributed to shareholders. This dividend was then tax-exempt in the hands of the investor up to ₹10 lakh. Now, the company pays no DDT. Instead, the dividend is added to your total income and taxed at your personal slab rate, making it crucial to report correctly in your Income Tax Return (ITR).

How are domestic dividends taxed for individuals?

Dividend income from Indian companies is classified under the head 'Income from Other Sources' in your ITR. It is added to your other income (like salary, business profit, or capital gains) to arrive at your Gross Total Income. This total income is then taxed as per the slab rates applicable to you. For Financial Year 2025-26, the new tax regime under Section 115BAC is the default option for all taxpayers. You must consciously opt out if you wish to follow the old regime.

Is TDS deducted on dividend income?

Yes, companies are legally obligated to deduct TDS on dividend payments. As per Section 194 of the Income-tax Act, 1961, an Indian company paying dividends to a resident shareholder must deduct TDS at 10% if the aggregate dividend amount in a financial year exceeds ₹5,000. If your PAN is not linked to your demat account, the TDS rate jumps to 20%. This deducted tax will appear in your Form 26AS and Annual Information Statement (AIS), and you can claim credit for it against your final tax liability. If your total income is below the taxable limit, you can submit Form 15G or Form 15H to the company to request non-deduction of tax.

Can I claim any deductions against dividend income?

Yes, but they are very limited. Under Section 57 of the Income-tax Act, you can claim a deduction only for interest expenses incurred on a loan taken specifically to invest in the shares that paid you the dividend. This deduction is capped at 20% of the dividend income earned. No other expenses, such as brokerage fees or portfolio management charges, can be claimed as a deduction against dividend income.

How are dividends from foreign companies taxed?

Dividends received from foreign companies are also taxable under 'Income from Other Sources' at your applicable slab rates. There is no threshold for this, and the entire amount is taxable. If you have paid any tax on that dividend in the foreign country, you may be able to claim a Foreign Tax Credit (FTC) in India under the provisions of the relevant Double Taxation Avoidance Agreement (DTAA) between India and that country. This prevents your income from being taxed twice.

What about dividends from mutual funds?

Income distributed by mutual funds, now known as Income Distribution cum Capital Withdrawal (IDCW), is treated exactly like dividends from company shares. These distributions are added to your total income and taxed at your slab rates. The Asset Management Company (AMC) will also deduct TDS at 10% on these distributions if the total amount exceeds ₹5,000 in a financial year. For a detailed guide, see our article on AIF and mutual fund taxation.

Feature	Pre-April 2020 (DDT Regime)	Post-April 2020 (Current Regime)
Taxpayer	Company paid Dividend Distribution Tax (DDT) @ ~20.56%.	Shareholder pays income tax.
Taxability in Shareholder's Hands	Exempt up to ₹10 lakh per annum. Taxable @ 10% above ₹10 lakh.	Fully taxable at the shareholder's applicable slab rate.
TDS by Company	No TDS on dividends to resident individuals.	TDS @ 10% if dividend exceeds ₹5,000 in a financial year.
Deduction for Expenses	Not applicable as income was mostly exempt.	Interest expense on loan for investment is deductible up to 20% of dividend.
Overall Impact	Benefitted high-income taxpayers as the tax rate was capped.	More equitable; tax is based on the individual's income level.

Worked example

Priya is a software engineer in Bengaluru with a gross salary of ₹15,00,000 for FY 2025-26. She is under the default new tax regime. She also received the following dividends:

From TCS: ₹40,000
From HDFC Bank: ₹30,000
From a small-cap firm: ₹4,000

Here is how her tax will be calculated:

Step 1: Calculate Total Income

Gross Salary: ₹15,00,000
Standard Deduction (New Regime): ₹75,000
Net Salary Income: ₹14,25,000
Total Dividend Income (₹40,000 + ₹30,000 + ₹4,000): ₹74,000 (Income from Other Sources)
Gross Total Income: ₹14,25,000 + ₹74,000 = ₹14,99,000

Step 2: Calculate Tax Liability (New Regime Slabs)

Up to ₹3,00,000: ₹0
₹3,00,001 to ₹6,00,000 (on ₹3,00,000 @ 5%): ₹15,000
₹6,00,001 to ₹9,00,000 (on ₹3,00,000 @ 10%): ₹30,000
₹9,00,001 to ₹12,00,000 (on ₹3,00,000 @ 15%): ₹45,000
₹12,00,001 to ₹14,99,000 (on ₹2,99,000 @ 20%): ₹59,800
Total Income Tax: ₹1,49,800
Add 4% Health & Education Cess: ₹5,992
Total Tax Liability: ₹1,55,792

Step 3: Adjust TDS

TDS on Salary (assumed): Let's say ₹1,10,000
TDS on Dividends (10% on ₹40,000 + 10% on ₹30,000): ₹4,000 + ₹3,000 = ₹7,000
Total TDS Deducted: ₹1,17,000
Net Tax Payable: ₹1,55,792 - ₹1,17,000 = ₹38,792

Priya must pay the balance tax of ₹38,792 before filing her ITR.

Common mistakes

Forgetting to report dividend income: Many investors mistakenly believe that since TDS is deducted, no further tax is due. TDS is only a partial payment of tax; you must report the gross dividend amount in your ITR and pay the balance tax.
Ignoring small dividend amounts: Dividends under ₹5,000 (on which no TDS is cut) are not tax-free. They are fully taxable and must be included in your total income.
Incorrectly checking dividend details: Always cross-verify the dividend amounts credited to your bank account with your Form 26AS and AIS/TIS on the income tax portal to ensure accurate reporting.
Not claiming interest deduction: If you have taken a loan to buy shares, forgetting to claim the interest paid (up to 20% of dividend income) under Section 57 leads to higher tax payment.

How SP & SC helps

Navigating the nuances of dividend taxation and ensuring accurate ITR filing can be complex. SP & SC Legal and Taxation Services provides comprehensive income tax filing services for individuals and businesses. We help you accurately compute your total income including dividends, claim eligible deductions and tax credits, and ensure your return is filed correctly and on time. Our team handles everything from reviewing your financial statements and AIS data to responding to any departmental queries post-filing.

Frequently asked questions

Is dividend income tax-free up to a certain limit?

No. After the abolition of DDT in 2020, dividend income is fully taxable in the hands of the shareholder. The previous exemption for dividend income up to ₹10 lakh under Section 10(34) has been removed. It is added to your total income and taxed at your slab rate.

How do I show dividend income in my ITR?

Dividend income must be reported under the schedule 'Income from Other Sources' (IFOS) in your Income Tax Return form. You should report the gross dividend amount, before the deduction of TDS.

What is the tax rate on dividends for NRIs?

For Non-Resident Indians (NRIs), dividends from Indian companies are generally taxed at a flat rate of 20% (plus applicable surcharge and cess). However, if a Double Taxation Avoidance Agreement (DTAA) between India and the NRI's country of residence specifies a lower rate (e.g., 10% or 15%), that lower rate will apply.

Do I need to pay advance tax on dividend income?

Yes. If your total tax liability in a financial year is estimated to be ₹10,000 or more, you must pay advance tax. Since dividend income can be unpredictable, the law allows you to pay the tax on such income in the next advance tax instalment due after you receive the dividend, without attracting interest for default on earlier instalments.

What is the difference between dividend and capital gains?

A dividend is a portion of a company's profits distributed to its shareholders, taxed as 'Income from Other Sources'. Capital gains, on the other hand, is the profit you make from selling the shares themselves. Capital gains are taxed under a separate head of income with different rates and rules.

Get a fixed-fee quote

Ensuring all your income sources are reported correctly is critical for tax compliance. Share your financial documents with us for a confidential review and a written fixed-fee quote for our end-to-end ITR filing and advisory services. Contact SP & SC or WhatsApp us at +91 90356 74566 to get started. We take care of the entire process, so you can focus on your investments.

How Dividends Are Taxed in India After 2020