What is Dividend Income?
A dividend is usually the distribution of profits by a company to its shareholders. If you invest in stocks, ULIPs, or mutual funds, you will receive dividends. However, in view of Section 2(22) of the Income-tax Act, the dividend shall also include the following:
- Distribution of accumulated profits to shareholders, entailing release of the company's assets;
- Distribution of debentures or deposit certificates to shareholders out of the accumulated profits of the company, and issue of bonus shares to preference shareholders out of the accumulated profits;
- Distribution made to shareholders of the company on its liquidation out of accumulated profits;
- Distribution to shareholders out of accumulated profits on the reduction of capital by the company;
- Loan or advance made by a closely held company to its shareholder out of accumulated profits.
How is dividend income taxed and reported in ITR?
Dividend income is now taxable in the hands of the investor. This means the company paying the dividend does not make it tax-free for the shareholder. The investor has to include the dividend amount in the income tax return and pay tax according to the slab rate applicable to them. Additionally, if the dividend received from a company exceeds ₹10,000, then the company will deduct TDS (tax deducted at source) at 10% under Section 194 of the Income Tax Act.
For individual taxpayers, income from stock dividends can be reported as "Income from other sources" in ITR-1 or ITR-2. If any TDS is deducted on dividends, it is reflected in Form 26AS and AIS.
| Type of income |
Where it goes in the ITR form |
| Dividend income |
"Income from Other Sources" in ITR-1 or ITR-2 |
| Capital gains (bonus/split shares sold) |
"Schedule CG" only in ITR-2 (you need ITR-2 once you have capital gains) |
| TDS already deducted on dividends |
Form 26AS and AIS, can claim credit automatically |
The due date to file ITR for AY 2026-27 is July 31, 2026.
Taxation of Dividend Income from Various Securities
Dividend income is taxable either at the recipient's applicable income tax slab rate or at a special rate prescribed under the Income-tax Act, depending on the residential status of the recipient and the nature of the security from which the dividend is received.
(a) Dividend from Shares
Resident taxpayers
- Dividend income is taxable at the applicable income tax slab rate.
- A deduction for interest expenditure incurred to earn such dividend income is allowed, subject to a maximum of 20% of the gross dividend income.
- No deduction is permitted for any other expense, including commission or remuneration paid for realizing the dividend.
Non-resident taxpayers
- Dividend income is taxable at a special rate of 20%, subject to relief available under the applicable Double Taxation Avoidance Agreement (DTAA).
- No deduction for expenses is allowed.
(b) Dividend from Mutual Funds
Resident taxpayers
- Taxable at the applicable income tax slab rate.
- Interest expenditure incurred for earning the dividend is deductible up to 20% of the gross dividend income.
Non-resident taxpayers
- Taxable at a special rate of 20%, subject to DTAA provisions.
- No deduction for expenses is allowed.
- However, where the dividend is received by a Foreign Portfolio Investor (FPI) from units purchased in foreign currency, the applicable tax rate is 10%.
(c) Dividend from Global Depository Receipts (GDRs)
Dividend covered under Section 115AC
- Taxable at a concessional rate of 10%.
- No deduction for any expenditure is permitted.
Dividend covered under Section 115ACA
- Taxable at a concessional rate of 10%.
- No deduction for any expenditure is permitted.
Other GDR dividends
- Taxable at the applicable income tax slab rate.
- Interest expenditure incurred for earning such dividend income is deductible up to 20% of the gross dividend income.
(d) Dividend from REITs and InVITs
Resident taxpayers
- Taxable at the applicable income tax slab rate.
- Interest expenditure incurred to earn such dividend income is deductible up to 20% of the gross dividend income.
Non-resident taxpayers
- Taxable at a special rate of 20%, subject to DTAA benefits, if applicable.
- No deduction for expenses is allowed.
Note: Dividend income is generally taxable in the hands of the recipient under the classical system of taxation introduced from FY 2020-21 onwards. Taxpayers should also consider applicable TDS provisions and DTAA benefits while determining their final tax liability.
Tax Rates on Dividend Income
Tax Rates on dividend income depends upon the type of assessee receiving the dividend and the instrument on which the dividend is distributed. This can be easily understood via the following table:-
| Category of Assessee |
Dividend nature |
Rate of Tax |
| Resident |
Dividend received from domestic company |
Normal rate of tax applicable to the assessee |
| NRI |
Dividend on GDR of Indian co./PSU (purchased in foreign currency) |
10% |
| NRI |
Dividend on shares of Indian company (purchased in foreign currency) |
20% |
| NRI |
Any other Dividend income |
20% |
| FPI |
Dividend on securities other than 115AB |
20% |
| Investment Division of offshore banking unit |
Dividend on securities other than 115AB |
10% |
When to Tax Dividend Income?
Section 8 of the Act provides that the final dividend, including the deemed dividend, shall be taxable in the year in which it is declared, distributed, or paid by the company, whichever is earlier. Whereas an interim dividend is taxable in the previous year in which the amount of such dividend is unconditionally made available by the company to the shareholder. In other words, an interim dividend is chargeable to tax on a receipt basis.
TDS on Dividend Income
As per Section 194, TDS shall be applicable to dividends distributed, declared, or paid on or after 01-04-2020; an Indian company shall deduct tax at the rate of 10% from dividend distributed to the resident shareholders if the aggregate amount of dividend distributed or paid during the financial year to a shareholder exceeds Rs.10,000. Earlier, upto FY 2024-25, this limit was Rs. 5,000. However, no tax shall be required to be deducted from the dividend paid or payable to Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC), or any other insurer in respect of any shares owned by it or in which it has full beneficial interest.
For non-resident individuals, TDS should be deducted at 20%, subject to any applicable double taxation avoidance agreements (DTAAs). Non-residents must provide documents like Form 10F, a declaration of beneficial ownership, and a certificate of tax residency to qualify for the reduced TDS rate under the treaty with their country of residence. Without these documents, higher TDS will be deducted, which can be claimed when filing an ITR.
Taxability of Dividend Income After the Abolition of DDT
Until 31 March 2020 (FY 2019–20), dividends received from Indian companies were generally exempt in the hands of shareholders. The Finance Act, 2020 introduced a significant shift in the taxation of dividends by replacing the DDT regime with the classical system of taxation. Under this system, dividends are taxed directly in the hands of the recipient rather than the distributing company.
Accordingly, all dividends received on or after 1 April 2020 are taxable in the hands of the investor or shareholder at the applicable tax rate.
As part of this reform:
- The obligation to pay Dividend Distribution Tax (DDT) by companies and mutual funds was abolished.
- Section 115BBDA, which imposed an additional 10% tax on dividend income exceeding ₹10 lakh received by resident individuals, HUFs, and firms, was withdrawn.
- Dividend income is now included in the recipient's total income and taxed according to the applicable provisions of the Income-tax Act.
- Shareholders and investors are responsible for reporting dividend income in their income tax returns and paying tax thereon, subject to applicable deductions and reliefs.
A resident individual receiving dividend income and whose estimated annual income is below the basic exemption limit can submit Form 15G to the company paying the dividend. Form 15G is a form of declaration that your annual income falls within the exempted slab and therefore, your TDS should not be deducted.
Similarly, a senior citizen whose annual income is below the basic exemption limit and the estimated tax liability is nil can submit Form 15H to the company paying the dividend.
Advance Tax on Dividend Income
If an individual’s total tax liability for the given financial year is more than or equal to Rs.10,000, then the advance tax provisions will be applicable. If the advance tax liability is not paid fully or partially, it might attract interest and penalties.
If the shortfall in the advance tax installment or the failure to pay the same on time is on account of dividend income, no interest under section 234C shall be charged, provided the assessee has paid full tax in subsequent advance tax installments. However, this benefit shall not be available in respect of the deemed dividend as referred to in Section 2(22)(e).
Dividend from a Foreign Company
A foreign corporation's dividend is taxable under "income from other sources." These dividends are included in the taxpayer's total income and taxed at their applicable rates. For example, if the taxpayer falls under the 30% tax slab, the dividend will be taxed at 30% plus cess. The investor can deduct interest expenses up to 20% of the gross dividend income, even for foreign dividends.
Under Section 194 of the Income-tax Act of 1961, the firm declaring the dividend must deduct TDS. If the dividend income exceeds Rs. 10,000 for an individual, TDS is 10%. If the beneficiary does not submit a PAN, the TDS rate increases to 20%.
Double Taxation Relief
Though any dividend received from a foreign company is taxable in India if it has also been taxed in the country where the foreign company operates, there is a case of double taxation. In these cases, you can claim relief on double taxation. You can claim the relief as per the provisions of the Double Tax Avoidance Agreement (DTAA), which the Indian Government has with the Governments of other countries. If the agreement is not available, you can also claim relief under Section 91 of the Income Tax Act and avoid paying double taxes on the same income.
As per most of the DTAAs India has entered into with foreign countries, the dividend is taxable in the source country in the hands of the beneficial owner of shares at a rate ranging from 5% to 15% of the gross amount of the dividends. In DTAA with countries like Canada, Denmark, and Singapore, the dividend tax rate is further reduced where the dividend is payable to a company that holds a specific percentage (generally 25%) of shares of the company paying the dividend. However, no minimum time limit has been prescribed in these DTAAs for which such shareholding should be maintained by the recipient company. Therefore, MNCs were often found misusing the provisions by increasing their shareholding in the company, declaring immediately before the declaration of the dividend, and offloading the same after getting the dividend.
Inter-Corporate Dividend
From AY 2020-21, the taxability of dividends has been shifted from companies to shareholders. Therefore, the Government has introduced a new section 80M under the Act to remove the cascading effect where a domestic company receives a dividend from another domestic company.
However, nothing has been prescribed where a domestic company receives a dividend from a foreign company and further distributes the same to its shareholders. The taxability in such cases shall be as under:
- Domestic co. receives a dividend from another domestic co.
The provisions of section 80M remove the cascading effect by providing that intercorporate dividend shall be reduced from the total income of the company receiving the dividend if the same is further distributed to shareholders one month prior to the due date of filing of return.
- Domestic co. receives a dividend from a foreign co.
Dividend received by a domestic company from a foreign company, in which such domestic company has 26% or more equity shareholding, is taxable at a rate of 15% plus Surcharge and Health and Education Cess under Section 115BBD. Such tax shall be computed on a gross basis without allowing a deduction for any expenditure.
Dividend received by a domestic company from a foreign company, in which equity shareholding of such domestic company is less than 26%, is taxable at the normal tax rate. The domestic company can claim a deduction for any expense incurred by it for the purposes of earning such dividend income.
Authorized by ITD
