Dividend refers to the portion of profit that is distributed by companies to its shareholders, either annually or quarterly, depending on their financial performance and dividend policy, as a return on investment to their shareholders.
When shareholders receive this dividend payout, it is known as dividend income.
Why Taxation on Dividend?
Over the past few years, there has been a significant rise in the number of individual investors participating in stock market, of many of them earning substantial amount of dividends on their equity portfolio, making lawmakers bring dividend income under the tax net.
How are Dividend Income Taxed in India?
As per the Income tax Act, 1961, dividend income is taxable under the head – Income from other sources in the hands of the shareholder.
For Individual and HUF taxpayers, dividend income is taxed at applicable slab rates based on their residential status.
In case of other taxpayers such as Companies, Partnership Firms, LLPs, Trusts and AOPs, dividend is taxed at the irrespective applicable tax rates as prescribed under the Income Tax Act.
Tax Rates Applicable on Dividend Income.
The different tax rates applicable for different categories of different taxpayers are highlighted below in concise tabular form:
| Taxpayer Type | Tax Treatment of Dividend Income | Tax Rate Applicable |
| Individual | Taxed under Income from Other Sources | As per individual slab rates |
| Hindu Undivided Family (HUF) | Taxed under Income from Other Sources | As per HUF slab rates |
| Company | Taxed under Income from Other Sources | As per applicable corporate tax rate |
| Partnership Firm / LLP | Taxed under Income from Other Sources | Flat 30% + surcharge & cess |
| Trust / AOP / BOI | Taxed under Income from Other Sources | As per applicable slab or rates under relevant provisions |
| Non-Resident (NRI, Foreign Company) | Taxed under Income from Other Sources | Flat 20% (plus surcharge & cess) under Section 115A (subject to DTAA benefit) |
TDS (Tax deducted at source) on Dividend Income
As per the Income Tax Act, 1961, companies or mutual funds distributing dividends are required to deduct TDS before making the payment to shareholders, subject to certain threshold limits and applicable rates as follows:
| Particulars | TDS Rate | Threshold Limit | Section Applicable |
| Resident Individual / HUF | 10% | If dividend exceeds ₹5,000 in a financial year | Section 194 |
| Non-Resident (NRI, Foreign Co.) | 20% (plus surcharge & cess) | No threshold | Section 195 |
| If PAN not provided by Resident | 20% | No threshold | Section 206AA |
Deductions allowed against dividend income
As per Section 57 of the Income Tax Act, 1961, a taxpayer can claim certain deductions from dividend income while computing taxable income.However, such deductions are very limited.
Interest expense incurred for earning Dividend income is allowed up to 20% of the dividend income received.
Important Points
- No other expense like commission, salary, etc. are allowed as deduction against dividend income.
- Only interest expense incurred on loan or borrowings taken for the purpose of investment in shares or mutual funds is allowed.
- Deduction is restricted to 20% of the gross dividend income received.
Latest Provisions and Updates on Dividend Taxation Rules for FY 2024-25
There have been no significant amendments or updates related to taxation of dividend income for FY 2024-25. The existing provisions continue to apply, where dividend income is taxed in the hands of the shareholder under the head ‘Income from other sources.’
The noteworthy point is: Effective from 1st October 2024, taxation for shares buyback has been revised.
Previously, companies were taxed at 20% on distributed income from buybacks, and shareholders were exempt from tax on the proceeds.
Under the new provisions, this tax liability shifts from the company to the shareholders.
Consequently, proceeds from share buyback will be treated as deemed dividend income and taxed accordingly to applicable tax rates.
Conclusion
Dividend income, though a passive source of income is fully taxable in the hands of the recipient as per the current Income Tax provisions.
Whether received from Indian companies or foreign companies, Dividend income shall be disclosed in the Indian Income Tax Return under the head Income from other sources.
FAQs
Yes, dividend received from Mutual funds is also taxable in the hands of investors as Income from other sources at applicable tax rates.
Yes, TDS provisions are same for senior citizens as for other individual taxpayers.
Note: Senior citizens can submit Form 15H if their total income is below taxable limit to avoid TDS.
No, dividend paid by companies to shareholder is an appropriation of profit and not an expense.
Hence, it is not allowed as deduction while computing taxable income of the company.