BAJAJ BROKING
March 24, 2025
4 mins read
Dividend income is a common source of earnings for investors who hold shares in companies or mutual funds. Before April 1, 2020, dividend income was tax-free for investors, as companies paid a Dividend Distribution Tax (DDT) before disbursing dividends. However, the Finance Act 2020 abolished DDT, shifting the tax liability to shareholders. Now, dividend income is taxed at the applicable income tax slab rates of the recipient. This change has significantly altered how investors report and manage dividend earnings.
With the shift in taxation, Tax Deducted at Source (TDS) now applies to dividends exceeding ₹5,000 in a financial year, deducted at 10% for resident shareholders. For non-resident investors, the TDS rate is 20%, subject to Double Taxation Avoidance Agreements (DTAA). Investors can also claim deductions for expenses incurred to earn dividend income, such as interest on loans taken to invest in shares, capped at 20% of the dividend amount. Understanding these changes is crucial for investors to ensure compliance and optimize tax liabilities.
Dividend income refers to earnings distributed by a company to its shareholders from its profits or retained earnings. When a company generates surplus revenue, it can either reinvest it into business operations or distribute a portion as dividends. These payments are typically made in cash, but can also be issued in the form of bonus shares or other assets. Investors earning dividends must understand their tax implications, as dividend income is taxable under the Finance Act 2020, with tax liability now resting on shareholders instead of companies.
Understanding dividend income and its taxation helps investors optimize tax liabilities and improve investment returns.
Dividend tax in India refers to the taxation imposed on earnings distributed by companies to their shareholders. Before April 1, 2020, companies paid a Dividend Distribution Tax (DDT) before disbursing dividends, making them tax-free for investors. However, the Finance Act 2020 abolished DDT, shifting the tax liability to the investors receiving dividends. Now, dividend income is taxed at the investor’s applicable income tax slab rates, making it crucial for shareholders to account for this income while filing their Income Tax Returns (ITR). Investors can efficiently manage their investments by using a trading account online to track dividend earnings and ensure tax compliance.
To ensure tax compliance, the government has introduced Tax Deducted at Source (TDS) on dividend payments. If a shareholder receives dividends exceeding ₹5,000 in a financial year, the company deducts TDS at 10% for resident investors and 20% for non-residents (subject to Double Taxation Avoidance Agreement benefits). Additionally, while resident investors can claim a TDS credit when filing their taxes, non-residents must provide documentation like Form 10F and a Tax Residency Certificate to avail lower tax rates. For seamless dividend investing, shareholders can open demat account to hold stocks and mutual funds electronically, ensuring efficient dividend payouts and tracking. Understanding these tax provisions helps investors plan their finances efficiently and avoid tax-related penalties.
Dividend income can be earned from various sources, and each category has different tax implications. Understanding these sources helps investors optimize tax planning and comply with Indian tax regulations.
Investors looking to improve dividend earnings and optimize taxation should open demat account to track all dividend sources efficiently and ensure smooth dividend crediting.
Dividend taxation in India underwent a significant shift with the Finance Act 2020, which abolished the Dividend Distribution Tax (DDT) and transferred the tax liability from companies to individual shareholders. Before this change, companies paid DDT at 15% (plus surcharge and cess) before distributing dividends, making them tax-free for investors. Additionally, under Section 115BBDA, individuals and Hindu Undivided Families (HUFs) were required to pay 10% tax on dividends exceeding ₹10 lakh per year. This system benefited smaller investors but resulted in a higher effective tax burden on companies.
From April 1, 2020, the responsibility of paying tax on dividend income shifted entirely to investors. Now, all dividend income is taxed as per the individual’s income tax slab rate, eliminating the earlier flat tax structure. TDS at 10% applies if the total dividend exceeds ₹5,000 in a financial year for residents, while non-resident investors face a 20% TDS deduction, subject to Double Taxation Avoidance Agreement (DTAA) benefits. This reform aligns India's dividend taxation with global practices, making it essential for investors to use a trading account online for tracking dividend earnings and open demat account to manage holdings efficiently.
Dividends received from domestic companies are now taxed in the hands of the shareholder as per their applicable income tax slab rate. Before April 1, 2020, dividends were tax-free for investors as companies paid a Dividend Distribution Tax (DDT) before disbursing payments. However, with the abolition of DDT under the Finance Act 2020, the tax burden shifted to the shareholders. TDS at 10% is deducted on dividends exceeding ₹5,000 in a financial year for resident investors, while non-residents face a 20% TDS, subject to Double Taxation Avoidance Agreement (DTAA) provisions.
For tax planning, investors can claim a deduction of up to 20% on interest expenses incurred to earn dividend income, such as loans taken for purchasing dividend-yielding stocks. Additionally, individuals with total taxable income below the exemption limit can submit Form 15G/15H to avoid TDS deductions. To efficiently track and manage dividend income, investors should open demat account and use a trading account online to streamline transactions and ensure smooth dividend crediting.
Dividends received from foreign companies are taxed under the head "Income from Other Sources" and are subject to taxation at the investor’s applicable income tax slab rate. Unlike dividends from domestic companies, there is no TDS deduction by Indian authorities on foreign dividends. However, many countries impose a withholding tax on dividends before remitting them to Indian investors. To avoid double taxation, investors can claim relief under Double Taxation Avoidance Agreements (DTAA) or Section 91 of the Income Tax Act, depending on whether India has a treaty with the dividend-paying country.
Additionally, investors earning foreign dividends can claim a deduction of up to 20% on interest expenses incurred to earn the income, such as loans taken to invest in foreign stocks. Since foreign dividend taxation can be complex, investors should use a trading account online to track international dividend earnings and ensure tax compliance. To facilitate seamless holding and trading of foreign stocks, it is advisable to open demat account with a broker that provides access to global markets.
Indian investors receiving dividends from foreign companies may face taxation in both the source country and India, leading to double taxation. To mitigate this, India provides tax relief through Double Taxation Avoidance Agreements (DTAA) and Section 91 of the Income Tax Act. If India has a DTAA with the foreign country, investors can claim a tax credit for the tax already paid abroad, reducing their overall tax liability. The DTAA tax rate on dividends generally ranges from 5% to 15%, depending on the treaty terms.
For countries where no DTAA exists, Section 91 allows investors to claim unilateral relief by deducting the foreign tax paid from their total Indian tax liability. To avail of these benefits, taxpayers must provide Form 10F, a Tax Residency Certificate (TRC), and a declaration of beneficial ownership while filing returns. Proper documentation ensures that investors avoid excess taxation. To efficiently track dividend earnings from global stocks, investors should open demat account with international trading capabilities and use a trading account online to monitor tax deductions and foreign remittances.
Inter-corporate dividends refer to dividends received by one domestic company from another domestic company. To prevent double taxation, the Finance Act 2020 introduced Section 80M, allowing a company to claim a deduction on the dividend received if it redistributes the same to its shareholders before the due date of filing its income tax return (ITR). This provision ensures that dividends are taxed only once in the hands of the final recipient, reducing the cascading tax effect.
However, if the recipient company does not redistribute the dividend, it is taxed as per the corporate tax rate applicable to that company. Additionally, dividends received from foreign companies are taxed at the standard corporate tax rate unless the recipient company holds at least 26% equity in the foreign company, in which case a concessional 15% tax rate applies under Section 115BBD. To streamline dividend investments and ensure compliance, businesses can open demat account to hold shares and use a trading account online for efficient dividend tracking.
Under Section 8 of the Income Tax Act, the taxation of final and interim dividends depends on when they are declared, distributed, or paid. A final dividend is taxable in the financial year in which the company declares, distributes, or pays it—whichever occurs first. This means that if a company declares a final dividend in March but distributes it in April, it is taxable in the earlier financial year.
In contrast, an interim dividend—which is declared and paid by the company during the financial year—is taxable in the year in which it is actually received by the shareholder. Since TDS at 10% applies to dividends exceeding ₹5,000 in a financial year for resident shareholders (20% for non-residents), investors must factor in TDS while filing their Income Tax Return (ITR). To efficiently track dividend payouts and ensure tax compliance, investors should open demat account to hold shares and use a trading account online for seamless dividend management.
The taxation of dividend income varies based on the investor's residency status and the source of the dividend. The following table outlines the applicable tax rates:
Investor Category | Dividend Source | Applicable Tax Rate | TDS Applicability |
Resident Individuals | Indian Company | Taxed as per income tax slab | 10% TDS if total dividend > ₹5,000 |
Hindu Undivided Family (HUF) | Indian Company | Taxed as per income tax slab | 10% TDS if total dividend > ₹5,000 |
Firms & LLPs | Indian Company | Taxed as per income tax slab | 10% TDS if total dividend > ₹5,000 |
Non-Resident Indians (NRIs) | Indian Company | 20% (subject to DTAA benefits) | 20% TDS (lower if DTAA applies) |
Foreign Companies | Indian Company | 20% (subject to DTAA benefits) | 20% TDS (lower if DTAA applies) |
Foreign Portfolio Investors (FPIs) | Indian Company | 20% | 20% TDS (as per Section 195) |
Domestic Companies | Another Domestic Company | Exempt under Section 80M, if redistributed | No TDS if dividend is redistributed before ITR filing |
Domestic Companies |
| 15% (Section 115BBD) | No TDS, taxed as business income |
Domestic Companies | Foreign Company (Holding <26% equity) | Taxed at corporate tax rate | No TDS, taxed as business income |
Dividends from Foreign Companies | Individual Shareholder (Resident) | Taxed as per income tax slab | No TDS by Indian authorities |
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Before April 1, 2020, dividends received from domestic companies were tax-free for shareholders since companies paid a Dividend Distribution Tax (DDT) before disbursing payments. Additionally, under Section 115BBDA, resident individuals and Hindu Undivided Families (HUFs) were required to pay 10% tax only if dividend income exceeded ₹10 lakh per year. This system allowed smaller investors to receive dividends without additional tax liability.
However, the Finance Act 2020 abolished DDT, making all dividend income taxable in the hands of the shareholder at their respective income tax slab rates. While there is no specific tax-free limit on dividend income anymore, TDS at 10% is applicable only if the total dividend received in a financial year exceeds ₹5,000 for resident investors. Non-resident shareholders face a 20% TDS deduction, which can be reduced under Double Taxation Avoidance Agreements (DTAA). Investors looking to optimize tax planning and efficiently track dividends should Open demat account and use a trading account online for seamless investment management.
Dividend income is taxed in the financial year in which the shareholder receives the dividend. For resident investors, dividends are added to their total taxable income and taxed as per the applicable income tax slab rate. If the total dividend received in a financial year exceeds ₹5,000, the dividend-paying company deducts TDS at 10% before crediting the amount. For non-residents, TDS is deducted at 20%, unless a Double Taxation Avoidance Agreement (DTAA) provides for a lower rate. Shareholders must report gross dividend income in their Income Tax Return (ITR), regardless of whether TDS has already been deducted.
The timing of taxation also depends on whether the dividend is final or interim. A final dividend is taxable in the financial year in which it is declared, distributed, or paid—whichever is earlier. On the other hand, an interim dividend is taxable in the year when the shareholder actually receives it. Investors can claim TDS credit while filing their ITR, ensuring no excess tax payment. To efficiently track and manage dividend income, shareholders should open demat account to hold stocks and use a trading account online for real-time monitoring of dividend earnings.
To ensure tax compliance, the Finance Act 2020 introduced Tax Deducted at Source (TDS) on dividend income. For resident shareholders, TDS is deducted at 10% if the total dividend received in a financial year exceeds ₹5,000. If the shareholder does not provide their Permanent Account Number (PAN), a higher TDS rate of 20% is applicable. For non-resident investors, TDS is deducted at 20%, subject to reductions under Double Taxation Avoidance Agreements (DTAA). The deducted TDS can be claimed as a credit while filing the Income Tax Return (ITR) to adjust the total tax liability.
Certain shareholders are exempt from TDS, including LIC, General Insurance Companies, and mutual funds. Additionally, individuals with annual income below the taxable threshold can submit Form 15G or Form 15H to avoid TDS deduction. To ensure efficient dividend tracking and compliance with tax regulations, investors should open demat account for secure holdings and use a trading account online for seamless monitoring of dividend payments and tax deductions.
Certain shareholders are exempt from TDS on dividend income, provided they meet specific conditions. Life Insurance Corporation of India (LIC), General Insurance Corporation (GIC), and other insurance companies are not subject to TDS deductions when receiving dividends. Similarly, mutual funds that invest in dividend-paying stocks are also exempt from TDS. Companies distributing dividends do not deduct TDS when paying these exempt entities, ensuring seamless dividend payouts without tax deductions at the source.
Additionally, individual investors with annual income below the taxable limit can avoid TDS on dividend income by submitting Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to the dividend-paying company. This ensures that TDS is not deducted at source, allowing investors to receive the full dividend amount. Investors who qualify for these exemptions should open demat account to efficiently manage their holdings and use a trading account online for tracking dividend income and ensuring compliance with tax regulations.
Unlike Tax Deducted at Source (TDS), which applies at the time of dividend payment, Tax Collected at Source (TCS) is generally applicable when dividends are remitted outside India. If a shareholder qualifies as a non-resident and receives dividend income that is repatriated abroad, TCS may be deducted under Section 206C of the Income Tax Act. The applicable TCS rate varies based on the nature of remittance and whether the recipient can claim benefits under a Double Taxation Avoidance Agreement (DTAA). However, for most resident shareholders, TCS does not apply to dividend earnings within India.
Under recent updates in Budget 2023-24, the TCS rate for international remittances under the Liberalised Remittance Scheme (LRS) was increased from 5% to 20%, affecting dividend payments transferred abroad. Shareholders remitting dividends internationally should ensure they provide the necessary documentation, such as a Tax Residency Certificate (TRC) and Form 10F, to avail of lower TCS rates. To efficiently track and manage dividend income, investors should open demat account for holding securities and use a trading account online to monitor tax deductions and remittance transactions.
Advance tax is applicable when a taxpayer’s total tax liability for a financial year exceeds ₹10,000. Since dividend income is now taxable in the hands of shareholders after the abolition of Dividend Distribution Tax (DDT), investors receiving substantial dividend payouts must pay advance tax in quarterly installments. If the taxpayer fails to pay advance tax on time, they may be liable to interest penalties under Section 234B and Section 234C of the Income Tax Act. However, an exception is made for unexpected dividend income, allowing taxpayers to pay the full tax amount in subsequent advance tax installments without incurring penalties.
For non-resident shareholders, advance tax provisions apply similarly, but TDS at 20% is already deducted on dividend payments. If the deducted TDS is insufficient to cover total tax liability, the NRI must pay advance tax on the remaining amount. Resident investors can claim a TDS credit while filing their Income Tax Return (ITR) to avoid double taxation. To efficiently manage tax payments and dividend tracking, investors should open demat account for seamless portfolio management and use a trading account online to monitor dividend inflows and tax deductions.
Investors earning dividend income can claim deductions on expenses incurred to earn such income, as per the provisions of the Finance Act 2020. The primary deductible expense is interest paid on loans taken to invest in dividend-paying stocks or mutual funds. However, the maximum deduction allowed is capped at 20% of the gross dividend income received in a financial year. Other expenses, such as brokerage fees, commission, or management expenses, are not eligible for deduction. This provision helps investors reduce their taxable dividend income and optimize their tax liabilities.
For example, if an investor earns ₹50,000 in dividend income and has paid ₹15,000 in interest on a loan used for share purchases, they can only claim a deduction of ₹10,000 (20% of ₹50,000). The remaining interest expense cannot be offset against dividend income. Additionally, non-resident investors may not be eligible for this deduction, depending on applicable Double Taxation Avoidance Agreement (DTAA) provisions. To efficiently track dividend earnings and deductions, investors should open demat account for secure holdings and use a trading account online for seamless monitoring of investment-related expenses and tax benefits.
Investors whose total annual income is below the taxable limit can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to avoid Tax Deducted at Source (TDS) on dividend income. If the total dividend received exceeds ₹5,000 in a financial year, companies deduct TDS at 10% before crediting the dividend. However, by submitting Form 15G or 15H, eligible investors can ensure that no TDS is deducted at the source, allowing them to receive the full dividend amount without tax deduction.
To claim TDS exemption, shareholders must submit Form 15G or 15H to the dividend-paying company at the beginning of the financial year. These forms must be renewed annually, and any false declaration can result in penalties. Investors should also ensure that their PAN is updated with the company, as failure to provide PAN results in a higher TDS deduction of 20%. To manage dividend payouts efficiently, investors should open demat account for seamless holdings and use a trading account online to track dividends and tax deductions in real time.
The Union Budget 2025 has brought a notable update to the Tax Deducted at Source (TDS) rules for dividend income, raising the TDS exemption limit from ₹5,000 to ₹10,000 per financial year. This revision provides relief to small and retail investors, as TDS will now be deducted only if total dividend income exceeds ₹10,000 in a year. The TDS rate remains unchanged at 10% for resident investors and 20% for non-residents, unless a lower rate applies under a Double Taxation Avoidance Agreement (DTAA).
This change aims to improve cash flow for investors, allowing them to receive higher dividend payouts without immediate tax deductions. Investors earning dividends below the new ₹10,000 threshold will not face TDS deductions, reducing the need for TDS refunds during Income Tax Return (ITR) filing. To efficiently manage dividend income and tax compliance, investors should open demat account for secure holdings and use a trading account online for real-time dividend tracking and taxation updates.
Dividend income is a crucial component of investment returns, but understanding its taxation is essential for efficient financial planning. With the abolition of Dividend Distribution Tax (DDT) in 2020, the responsibility of paying tax on dividends now lies with shareholders. Dividend earnings are taxed as per the investor's income tax slab rate, and TDS at 10% applies if the total dividend exceeds ₹10,000 per year (as per the Budget 2025 update). For non-residents, TDS is deducted at 20%, subject to Double Taxation Avoidance Agreement (DTAA) benefits. Investors can also claim deductions on interest expenses incurred to earn dividend income, with a maximum deduction limit of 20% of gross dividends.
Proper tax planning ensures that investors maximize returns while staying compliant with tax regulations. Submitting Form 15G or 15H helps eligible shareholders avoid unnecessary TDS deductions, and timely advance tax payments prevent interest penalties under Sections 234B and 234C. To efficiently manage dividend earnings and tax obligations, investors should Open Demat Account for holding securities and use a Trading Account Online for seamless dividend tracking, ensuring accurate reporting and optimized tax benefits.
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Dividend distribution is the process where a company shares profits with its shareholders as cash dividends, stock dividends, or other assets. Companies with surplus earnings may distribute them periodically. To manage investments efficiently, shareholders should open demat account for seamless dividend tracking.
As per the Finance Act 2020, the tax liability on dividend income shifted from companies to individual shareholders. Now, dividends are taxed as per the recipient’s income tax slab rate. Investors can use a trading account online to monitor dividend payments and tax deductions.
Dividend income is taxed at the investor’s applicable income tax slab rate. TDS at 10% is deducted if annual dividend income exceeds ₹10,000 for residents. For non-residents, TDS is 20%, subject to Double Taxation Avoidance Agreement (DTAA) benefits. Investors should open demat account to track dividend taxation.
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