Tax on Dividend Income in India (FY 2024-25 & AY 2025-26): A Complete Guide
- Rashmita Choudhary
- Jul 25
- 16 min read
Many people have received dividends and now wonder how they are taxed in India. The rules for tax on dividend income changed quite a bit since April 1, 2020, because the government abolished the Dividend Distribution Tax (DDT). This guide clearly explains how dividend income is taxed for individuals, NRIs, and companies in India for the current Financial Year 2024-25 (which corresponds to Assessment Year 2025-26), covering TDS rules, reporting in ITR, and even recent updates like the proposed higher TDS threshold from FY 2025-26, helping you in understanding your income tax obligations. Readers will learn key things about dividend taxation, current rates, TDS, foreign dividends, Double Taxation Avoidance Agreements (DTAA), and how to follow all the rules.
Table of content
The Big Shift: Dividend Taxation Before and After April 1, 2020
How is Dividend Income Taxed for Resident Individuals & HUF (AY 2025-26)?
TDS on Dividend Income: Section 194 and Section 194K Explained
Are Any Expenses Allowed as a Deduction from Dividend Income?
How to Report Dividend Income in Your Income Tax Return (ITR)?
Conclusion: Stay Informed & Compliant with Dividend Tax Rules
What is Dividend Income?
What is dividend income? It's simply a part of a company's profit that it gives out to its shareholders. People who own shares in companies or units in mutual funds can receive this income. It’s a way for companies to share their success with those who have invested in them.
One can receive dividends from:
Shares in Indian companies (domestic companies)
Shares in companies based in other countries (foreign companies)
Units of mutual funds
Companies might announce interim dividends during the year or final dividends after the financial year ends. For the person receiving it, both types are generally taxed in the same way. Understanding the dividend meaning helps in grasping how sources of dividend income are treated under tax laws when investing in shares or mutual fund units.
The Big Shift: Dividend Taxation Before and After April 1, 2020
The way tax on dividend income is handled saw a major change from April 1, 2020. Understanding the old versus new dividend tax system is quite important for every taxpayer.
Old Regime (Until March 31, 2020/FY 2019-20) Previously, the ddt abolished system was not in place. Instead, companies paid a Dividend Distribution Tax (DDT) before giving out dividends. This meant the dividend income was generally exempt in the hands of shareholders under Section 10(34) of the Income Tax Act. However, a special rule under Section 115BBDA applied to resident individuals, HUFs, and certain firms. If their dividend income from Indian companies went over Rs. 10 lakh in a financial year, they had to pay an additional tax at 10% on the amount exceeding Rs. 10 lakh. The tax on dividend income fy 2019-20 was primarily the company's responsibility through DDT.
New Regime (From April 1, 2020/FY 2020-21 Onwards) The Finance Act, 2020 brought a big shift by abolishing DDT. This means companies no longer pay DDT. Now, the dividend taxation changes India make the dividend taxable directly in the hands of the shareholder or investor. This dividend income gets added to their "Income from Other Sources". It's then taxed at the income tax slab rates that apply to the individual or HUF. This system applies to tax on dividend income from fy 2020-21 onwards.
Here’s a simple comparison:
Feature | Taxability Before April 1, 2020 | Taxability After April 1, 2020 |
Who pays tax on dividend | Company (as DDT) | Shareholder/Investor |
Tax in hands of shareholder | Exempt (u/s 10(34)), but 10% tax if > Rs. 10 lakh (u/s 115BBDA for residents) | Taxable at applicable slab rates |
Relevant Sections | Section 10(34), Section 115BBDA, Section 115-O | Taxed under "Income from Other Sources" |
This change makes the tax system more straightforward in some ways, as the tax is now directly linked to the investor's income level.
How is Dividend Income Taxed for Resident Individuals & HUF (AY 2025-26)?
For resident individuals and Hindu Undivided Families (HUF), the tax on dividend income India for residents is now part of their total income. This means that dividend income gets added to other earnings like salary, business profit, or interest. The combined total income is then taxed according to the individual's applicable income tax slab rate for the Assessment Year 2025-26. Taxpayers can choose between the dividend income old tax regime and the dividend income new tax regime, and the slab rates under the chosen regime will apply.
Here’s a simple way to think about it:
Dividend income is added to your total taxable income.
This total income is taxed at the slab rates you fall into.
For example, if your total income, including dividends, puts you in the 30% tax bracket, then the dividend portion of your income also faces a 30% tax.
On top of the basic tax, a Health and Education Cess (currently 4%) applies. If the total income is very high, a surcharge might also be applicable. It's important for taxpayers to check the current income tax slab rates to understand their exact liability. When dividend income is significant, carefully comparing the old and new tax regimes can help in making a beneficial choice.
TDS on Dividend Income: Section 194 and Section 194K Explained
Tax Deducted at Source (TDS) applies to dividend income. This system helps the government ensure tax compliance by collecting tax when the income is paid out. Two main sections deal with TDS on dividends: Section 194 for dividends from companies and Section 194K for dividends from mutual funds.
TDS on Dividend from Indian Companies (Section 194)
The tds on dividend section 194 requires companies to deduct tax before paying dividends to their shareholders. This rule for tds on shares dividend has specific conditions.
Applicability: Indian companies deduct TDS when paying dividends to resident shareholders.
Rate: The dividend tds rate is 10% if the shareholder has provided their PAN (Permanent Account Number).
Rate if PAN not provided/inoperative: If PAN is not available or not working, the TDS rate jumps to 20%.
Threshold Limit: TDS is deducted if the total dividend paid to a shareholder by a single company exceeds Rs. 5,000 in a financial year. This is the dividend income tds limit for dividends paid up to March 31, 2025.
Critical Update: There's a proposed tds threshold dividend income increase. Budget 2025 discussions suggest raising this limit to Rs. 10,000 for individuals, effective from April 1, 2025 (FY 2025-26). It's important to remember this is a proposal and will apply once officially notified.
Exemptions/Non-deduction: Individuals whose total income is below the taxable limit can submit Form 15G for dividend (for those below 60 years) or Form 15H for dividend (for senior citizens) to the company. This tells the company not to deduct TDS.
Here's a quick look at the TDS rates:
Condition | TDS Rate (PAN provided) | TDS Rate (No PAN/Inoperative PAN) |
Dividend from Indian Company (Sec 194) | 10% | 20% |
Shareholders should ensure their PAN is correctly updated with companies to avoid higher TDS.
TDS on Dividend Income from Mutual Funds (Section 194K)
The tds on mutual fund dividend section 194k applies to dividends paid by mutual funds. This section was introduced to create a similar TDS system for mutual fund dividends as for company shares.
Applicability: Mutual Fund houses or Asset Management Companies (AMCs) deduct TDS when they pay dividends to resident unitholders.
Rate: The mutual fund dividend tds rate is 10% if the unitholder provides their PAN.
Rate if PAN not provided/inoperative: If PAN details are missing or incorrect, TDS is deducted at 20%.
Threshold Limit: TDS applies if the dividend income from a mutual fund to a unitholder exceeds Rs. 5,000 in a financial year for FY 2024-25. While some sources mention varying limits historically, Rs. 5,000 is the widely cited 194k threshold limit for FY 2024-25. It is expected that the proposed general increase in the dividend TDS threshold to Rs. 10,000 from FY 2025-26 might also apply to Section 194K for consistency, but official confirmation for this specific section is awaited.
Scope: This TDS is specifically for tds on equity mutual fund dividend income and does not apply to capital gains from selling mutual fund units.
Unitholders can also submit Form 15G/15H to mutual funds to prevent TDS deduction if their income is below taxable limits. It is good to learn more about TDS and the process of submitting Form 15G/15H.
Tax on Dividend Income for Non-Resident Indians (NRIs)
The tax on dividend for nri ay 2025-26 means that dividend income earned by Non-Resident Indians (NRIs) from Indian companies is taxable in India. The rules for them are a bit different from resident individuals.
The nri dividend income tax rate India is a flat 20% on the gross dividend amount. Applicable surcharge and cess will also be added to this rate.
Regarding tds on dividend to nri, the company paying the dividend deducts tax under Section 195. The TDS rate is 20% plus any applicable surcharge and cess. However, NRIs might get a benefit here. If India has a Double Taxation Avoidance Agreement (DTAA) with the NRI's country of residence, the tax can be deducted at the rate specified in the DTAA, if it's lower than 20%. The dtaa rates for dividend India can vary from one country to another.
To claim the DTAA benefit, NRIs usually need to provide these documents to the Indian company:
Tax Residency Certificate (TRC) from their country of residence.
Form 10F (this can often be filed electronically now).
PAN card copy.
A declaration stating they do not have a Permanent Establishment (PE) in India.
NRIs should check the specific DTAA between India and their country of residence for the exact rates and conditions. They can explore the official DTAA provisions on the Income Tax Department website. Learning about taxation rules for NRIs can be very helpful.
Taxation of Dividends Received from Foreign Companies
The tax on foreign dividend income in India means that when Indian residents receive dividends from foreign companies (for example, dividend from US shares taxable in India), this income is taxable in India. This income is classified under the head "Income from Other Sources" and is taxed at the individual’s applicable slab rates.
Often, the country where the foreign company is based (the source country) might also tax this dividend income. This can lead to a situation where the same income is taxed twice. To provide relief from this double taxation, India’s Income Tax Act has provisions under Section 90 and Section 91.
Here’s how relief can be claimed:
If DTAA exists (Section 90): If India has a Double Taxation Avoidance Agreement with the country where the foreign company is located, taxpayers can claim relief as per the terms of that DTAA. This usually involves claiming a foreign tax credit for the taxes paid in the foreign country.
If no DTAA exists (Section 91): If there’s no DTAA between India and the foreign country, taxpayers can still claim unilateral relief under Section 91 of the Income Tax Act. This also allows for a credit of the foreign tax paid.
A key point for deduction on foreign dividend income is that interest expenses incurred specifically for earning such foreign dividends can be claimed as a deduction. However, this deduction is limited to 20% of the gross dividend income received from that foreign source. Understanding the taxation of foreign income and understanding DTAA benefits is crucial for residents with foreign investments.
A simple way to think about it: Received Foreign Dividend? -> Was it Taxed in the Foreign Country? (Yes/No) -> It's Taxable in India (Yes) -> You can Claim Relief (DTAA under Sec 90 / Unilateral relief under Sec 91).
Are Any Expenses Allowed as a Deduction from Dividend Income?
Many ask about claiming a deduction against dividend income. After the Dividend Distribution Tax (DDT) was removed, dividend income is generally taxed on a gross basis. However, there is one specific interest expense on dividend income that the Income Tax Act allows as a deduction.
The only expense explicitly permitted as a deduction from dividend income (whether from domestic or foreign companies) is the interest paid on money borrowed to invest in those shares or mutual fund units that generated the dividend. This means if an investor took a loan to buy shares, the interest paid on that loan can be deducted. But there's a catch for the 20% deduction dividend rule: this deduction cannot be more than 20% of the gross dividend income earned from those specific investments. No other expenses allowed for dividend income, like bank charges for collecting dividends or commission paid to brokers for investment advice, are allowed as deductions against dividend income.
Let's look at a simple example:
Dividend Income Received: Rs. 10,000
Actual Interest Paid on Loan Taken for These Shares: Rs. 3,000
Maximum Deduction Allowed (20% of Rs. 10,000): Rs. 2,000
Taxable Dividend Income: Rs. 10,000 - Rs. 2,000 = Rs. 8,000
So, even if more interest was paid, the deduction is capped at 20% of the dividend.
How to Report Dividend Income in Your Income Tax Return (ITR)?
It is very important to report dividend income in itr accurately. All dividend income, regardless of the amount, must be declared when filing your income tax return. You need to know where to show dividend income in itr.
Here’s how to do it:
Where to Report: Dividend income is reported under the schedule "Income from Other Sources" (IFOS) in the relevant ITR form.
Verification: Before filing, it’s wise to cross-check the dividend income details with your Form 26AS (Annual Tax Statement) and AIS (Annual Information Statement)/TIS (Taxpayer Information Summary). These documents, available on the income tax portal, will show dividends credited to you and any TDS deducted on ais dividend income. Any form 26as dividend details should match what you report.
Foreign Dividends: If you've received dividends from foreign companies and hold those shares outside India, you might also need to report these in Schedule FA (Foreign Assets) in your ITR.
ITR Form: The correct itr form for dividend income depends on your overall income profile. For many individuals, ITR-1 (Sahaj) might be usable if they only have salary, one house property, and other income (like interest and dividends) up to Rs. 50 lakh. However, if you have capital gains or foreign income (including foreign dividends), you'll likely need to use ITR-2. If you have income from a business or profession, ITR-3 would be applicable.
Ensuring accurate reporting helps in smooth processing of your return. Taxpayers can visit the official income tax portal for forms and information, or use services to help file your Income Tax Return and for understanding Form 26AS and AIS.
Tax Planning Considerations for Dividend Income
When considering how to save tax on dividend income, a few legitimate tax planning dividend income strategies can be explored. However, it's crucial to remember the following.
Disclaimer: This information is for educational purposes only and should not be taken as financial or tax advice. Always consult a qualified tax advisor for personalized planning suitable to your specific situation. TaxBuddy experts can provide expert tax planning advice.
Here are some points for dividend income tax saving to discuss with an advisor:
Form 15G/15H: If your total estimated income for the year is below the basic taxable limit, you can submit Form 15G (if under 60 years) or Form 15H (for senior citizens) to the dividend-paying company or mutual fund. This helps in receiving dividend income without TDS deduction. You can learn about Form 15G/15H for more details.
Choosing a Tax Regime (New vs. Old): If dividend income forms a significant portion of your total income, analyze whether the new tax regime or the old tax regime is more beneficial. The old regime allows various deductions and exemptions which might lower your tax, while the new regime offers lower tax rates but fewer deductions.
Investment Choices: For some investors, especially those in higher tax brackets, growth options in mutual funds might be a consideration. Growth options do not declare dividends; instead, profits are reinvested, leading to an increase in the Net Asset Value (NAV). Tax is payable only as capital gains when the units are sold. This can help defer tax and potentially benefit from lower long-term capital gains tax rates, compared to dividends which are taxed at slab rates.
Spousal/Family Member Investments (with caution): Sometimes, people consider investing in the name of a family member who is in a lower tax bracket. However, one must be extremely careful about clubbing provisions under the Income Tax Act. If these rules are not followed strictly, the income might be added back to the original investor's income. This strategy requires careful legal and tax consideration.
Holding Period for Shares (Capital Gains Context): While the tax on dividend income itself isn't directly affected by how long you hold shares, the tax on gains from selling those shares is. Long-term capital gains (from shares held over a year) are taxed differently (often at a lower rate) than short-term capital gains. This might be part of an overall investment strategy to reduce tax on dividends India by focusing on long-term growth rather than frequent dividend payouts if tax efficiency is a prime goal.
Important Note: Always ensure any tax planning strategy is fully compliant with current tax laws.
Common Misconceptions about Dividend Income Tax
There are several dividend income tax myths that can lead to confusion. Let’s clarify some common ones.
Misconception: "Dividend income is completely tax-free."
Clarification: This is false. After the Dividend Distribution Tax (DDT) was abolished in 2020, dividend income is now taxable in the hands of the shareholders at their applicable slab rates. The idea that is dividend income tax free is no longer true for most investors.
Misconception: "TDS deduction means my tax liability is fully met."
Clarification: This is false. TDS is only an advance tax deducted by the payer. Your final tax liability depends on your total income and the tax slab you fall into. If your slab rate is higher than the TDS rate (usually 10%), you will need to pay the additional tax. If it's lower, or if you have deductions, you might be eligible for a refund.
Misconception: "The Rs. 5,000 limit means dividends up to Rs. 5,000 are tax-exempt." Clarification: This is false. The dividend income 5000 limit is a threshold for TDS deduction, not an exemption limit for your income tax liability. All taxable dividend income, even if below Rs. 5,000 from a single source, must be added to your total income and taxed as per your slab rate. TDS is just not deducted if the amount from one company/mutual fund is below this threshold in a year.
Misconception: "I don't need to report small dividend amounts."
Clarification: This is false. All income, irrespective of how small the amount is, should be reported in your Income Tax Return. Accurate reporting is essential for compliance.
Key Takeaways: Tax on Dividend Income at a Glance
Here’s a dividend tax summary India with the most critical points about the key points tax on dividend:
✅ Dividends are taxable in the hands of shareholders at their applicable income tax slab rates since Dividend Distribution Tax (DDT) was abolished.
✅ TDS at 10% (if PAN is provided) is deducted by companies on dividend payments if the amount exceeds Rs. 5,000 per shareholder in a financial year (this threshold is proposed to be Rs. 10,000 from FY 2025-26, subject to notification).
✅ TDS at 10% (if PAN is provided) is deducted by mutual funds on dividend payments if the amount exceeds Rs. 5,000 per unitholder in a financial year (FY 2024-25). Clarity is awaited if the proposed Rs. 10,000 threshold will also apply here from FY 2025-26.
✅ For Non-Resident Indians (NRIs), dividend income is taxed at 20% (plus applicable surcharge and cess), or at the rate specified in the relevant Double Taxation Avoidance Agreement (DTAA), whichever is more beneficial.
✅ Dividends received by Indian residents from foreign companies are also taxable at their slab rates. Relief can be claimed under DTAA provisions or Section 91 (for foreign tax credit).
✅ Interest expense incurred on money borrowed to earn dividend income can be claimed as a deduction, but it's limited to 20% of the gross dividend income.
✅ All dividend income must be reported in the Income Tax Return (ITR) under the schedule "Income from Other Sources."
You can always explore more tax guides on TaxBuddy.
Conclusion: Stay Informed & Compliant with Dividend Tax Rules
Ensuring dividend tax compliance is crucial for every investor. The key thing to remember is that dividend income is now taxable according to your income tax slab rates, and TDS provisions are in place. Correctly reporting this income in your tax returns is essential. Tax laws can change, so understanding dividend tax rules and staying updated is very important. If you need assistance with your dividend income taxation or filing your ITR, Contact TaxBuddy experts they are here to help with your taxbuddy tax help needs.
Frequently
Asked Questions (FAQs) on Dividend Income Tax
Is dividend income taxable in India?
Yes, dividend income is taxable in the hands of the shareholder in India. It is added to their total income and taxed at applicable slab rates.
What was Dividend Distribution Tax (DDT)?
Dividend Distribution Tax (DDT) was a tax that companies paid on the dividends they distributed to shareholders. This tax has been abolished since April 1, 2020.
What is the current TDS rate on dividend income for residents?
The current TDS rate on dividend income for residents is 10% if PAN is provided and the dividend amount exceeds the threshold.
What is the TDS threshold for dividend income from companies for FY 2024-25? What is proposed for FY 2025-26?
For FY 2024-25, the TDS threshold for dividend income from companies is Rs. 5,000 per financial year from a single company. It is proposed to be increased to Rs. 10,000 from FY 2025-26, subject to official notification.
How is dividend income from mutual funds taxed?
Dividend income from mutual funds is added to the investor's total income and taxed at their applicable slab rates. TDS under Section 194K at 10% applies if the dividend from a mutual fund exceeds Rs. 5,000 in a financial year for FY 2024-25.
Are dividends received from foreign companies taxable in India?
Yes, dividends received by Indian residents from foreign companies are taxable in India at their applicable slab rates under "Income from Other Sources".
Can I claim expenses against dividend income?
Yes, you can claim a deduction for interest paid on a loan taken to invest in shares or mutual funds that paid the dividend. This deduction is limited to 20% of the gross dividend income.
How is dividend income taxed for NRIs?
Dividend income for NRIs is taxed at a flat rate of 20% (plus applicable surcharge and cess), or at a lower rate if specified in the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence.
Do I need to show dividend income in my ITR?
Yes, all dividend income must be reported in your Income Tax Return under the schedule "Income from Other Sources".
What happens if my PAN is not linked or incorrect for TDS on dividends?
If your PAN is not provided, invalid, or not linked with Aadhaar, TDS on dividends will be deducted at a higher rate, typically 20%.
Can I submit Form 15G/15H for dividend income?
Yes, if you are eligible (i.e., your total income is below the taxable limit), you can submit Form 15G (for individuals below 60) or Form 15H (for senior citizens) to the company or mutual fund to receive dividends without TDS deduction.
Is there any tax on dividends if my total income is below the basic exemption limit?
If your total income, including dividends, is below the basic exemption limit, you will not have any tax liability. However, TDS might still be deducted if the dividend amount crosses the TDS threshold. In such cases, you can claim a refund by filing your ITR.
How does DTAA help in saving tax on dividend income?
DTAA helps avoid or reduce double taxation. For NRIs receiving dividends from Indian companies, DTAA may prescribe a lower tax rate. For Indian residents receiving foreign dividends, DTAA allows claiming credit for taxes paid in the foreign country.
Is STT applicable on dividend income?
No, Securities Transaction Tax (STT) is applicable on the transaction value when buying or selling securities, not on the dividend income itself.
Where can I see the TDS deducted on my dividend income?
You can see the TDS deducted on your dividend income in your Form 26AS (Annual Tax Statement) and AIS (Annual Information Statement)/TIS (Taxpayer Information Summary) available on the income tax portal.
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