For equity investors, dividends are another source of earnings apart from capital gains. These dividends are taxable in the hands of the investor, not the company. They must be reported under “Income from Other Sources” and are taxed at the applicable slab rates. If the dividend amount exceeds ₹10,000, the company will deduct TDS at 10% under Section 194.
This article explains the tax rules applicable to dividend income.
Dividend Received From an Indian Company
Any dividend earned from an Indian company is taxable for the shareholder, not the company.
With the removal of Dividend Distribution Tax (DDT), the responsibility of paying tax on dividend income now lies with the investor.
Old vs. New Provisions on Dividend Income Taxation
Up to 31 March 2020 (FY 2019-20), dividends received from Indian companies were exempt from tax since the company declaring them had already paid DDT before distribution.
However, the Finance Act 2020 changed this framework. From 1 April 2020 onwards, all dividend income is taxable in the hands of the shareholder or investor. The liability of DDT on companies and mutual funds has been removed. Likewise, the 10% tax on dividend income exceeding ₹10 lakh for resident individuals, HUFs, and firms (under Section 115BBDA) has also been abolished.
TDS on Dividend Income
As per the Finance Act, 2020, companies and mutual funds are required to deduct TDS on dividend payments made on or after 1 April 2020. TDS is deducted at the rate of 10% on dividends exceeding ₹10,000 in a financial year. (Earlier, the threshold was ₹5,000 until FY 2024-25.)
Example:
Mr. Ravi received a dividend of ₹16,000 from an Indian company on 15 June 2025. Since the dividend amount crosses ₹10,000, TDS @10% will be deducted, i.e., ₹1,600 (₹16,000 × 10%). Therefore, Mr. Ravi will get ₹14,400 (₹16,000 – ₹1,600) in hand. Additionally, this dividend income will be added to his taxable income and taxed as per the applicable slab rates for FY 2025-26 (AY 2026-27).
For non-resident investors, TDS is deducted at 20%, subject to the provisions of the Double Taxation Avoidance Agreement (DTAA). To claim the benefit of a lower TDS rate under a treaty, non-residents must submit documents such as Form 10F, proof of beneficial ownership, a tax residency certificate, and a declaration. If these documents are not provided, higher TDS will be deducted, which can later be adjusted when filing the income tax return.
Deduction of Expenses from Dividend Income
Taxpayers can claim a deduction for interest expenses incurred for earning dividend income. However, the deduction is restricted to 20% of the dividend received.
Other expenses such as commission, salary, or any additional costs related to earning dividends are not deductible.
Example:
If Mr. Ravi borrowed funds to invest in shares and paid interest of ₹3,700 during FY 2025-26, he can claim only ₹3,200 (i.e., up to 20% of his dividend income) as an allowable deduction against dividend income.
Submission of Form 15G/15H
A resident individual receiving dividends, whose total estimated annual income is below the basic exemption limit, can submit Form 15G to the company or mutual fund distributing the dividend.
In the case of senior citizens, if the estimated tax liability for the year is nil, they can submit Form 15H to the company paying the dividend.
The company or mutual fund usually notifies shareholders about dividend declarations via their registered email ID and requests submission of Form 15G or Form 15H to ensure that dividend payments are made without deduction of TDS.
Advance Tax on Dividend Income
If a taxpayer’s total tax liability for a financial year is ₹10,000 or more, advance tax provisions apply. Failure to pay or short payment of advance tax will result in interest and penalty.
Dividend Received From a Foreign Company
Dividends earned from a foreign company are taxable and are treated as “Income from Other Sources.” These dividends form part of the taxpayer’s total income and are taxed at the slab rates applicable to the individual.
For example, if the taxpayer falls under the 30% tax bracket, the dividend received from a foreign company will also be taxed at 30% plus applicable cess.
Even in the case of foreign dividends, a deduction for interest expense is allowed, but it is capped at 20% of the gross dividend income.
Additionally, as per Section 194 of the Income Tax Act, 1961, the company paying the dividend must deduct TDS. A 10% TDS is applied if the dividend exceeds ₹10,000 for an individual. However, if the recipient has not provided a valid PAN, the TDS rate increases to 20%.
Relief from Double Taxation
Dividends received from a foreign company are subject to tax both in India and in the country where the foreign company is based.
If dividend income has been taxed in both countries, the taxpayer can claim relief from double taxation.
This relief can be claimed in two ways:
- As per the Double Taxation Avoidance Agreement (DTAA) signed between India and the country of the foreign company, or
- Under Section 91 of the Income Tax Act, if no DTAA exists.
This ensures that the same income is not taxed twice.
Related FAQs
Are any expenses allowed as a deduction from dividend income under “Income from Other Sources”?
Yes. Interest paid on money borrowed to invest in shares or mutual funds can be claimed as a deduction. However, this deduction is restricted to 20% of the gross dividend income. Other expenses, such as commission or fees paid to recover dividend income, are not allowed. The restriction applies to dividends from both domestic and foreign companies.
Is dividend income reported in the Income Tax Return (ITR)?
Yes. Dividend income must be shown under the head “Income from Other Sources” while filing ITR.
Is dividend income taxable in India?
Yes. Dividend income is taxable in the hands of shareholders or investors in India.
What is Dividend Distribution Tax (DDT)?
Earlier, domestic companies in India were required to pay DDT at 15% on any dividend declared, distributed, or paid. This tax was payable even if the company itself was not liable to pay income tax. However, the Finance Act, 2020 abolished DDT with effect from 1 April 2020, shifting the tax liability to investors.
How are dividends from foreign companies taxed in India?
Dividends received from foreign companies are treated in the same way as those from Indian companies. They are included in the total income of the recipient and taxed as per the individual’s applicable income tax slab rates.
Do I have to pay tax on dividend income in India?
Yes. Dividend income is taxable in the hands of the investor/shareholder as per their income tax slab rates.
Is there any TDS on dividend income?
Yes. If the dividend paid by a company or mutual fund exceeds ₹10,000 in a financial year, TDS at 10% is deducted under Section 194. For non-residents, the TDS rate is 20% (subject to DTAA benefits).
Can I avoid TDS on dividend income?
Resident individuals with income below the taxable limit can submit Form 15G, and senior citizens with nil tax liability can submit Form 15H to avoid TDS deduction.
How is dividend income from a foreign company taxed in India?
Dividends from foreign companies are taxable under “Income from Other Sources” at the applicable slab rates of the taxpayer. Relief from double taxation may be available under DTAA or Section 91.
Can I claim deductions on expenses against dividend income?
Yes. Only interest paid on borrowed funds used for investing in shares or mutual funds can be claimed as a deduction, capped at 20% of gross dividend income. No other expenses such as commission or salary are deductible.
Do I need to pay advance tax on dividend income?
Yes. If your total tax liability, including tax on dividend income, is ₹10,000 or more in a financial year, advance tax rules apply.
How did the taxation of dividends change after 1 April 2020?
Before 31 March 2020, dividend income was exempt for investors because companies paid Dividend Distribution Tax (DDT). From 1 April 2020 onwards, DDT was abolished, and dividend income became taxable in the hands of investors.
