Key Takeaways
- Dividends from Indian companies and mutual funds are taxed at slab rates in the hands of the shareholder or unitholder. The old Dividend Distribution Tax (DDT) regime was abolished from FY 2020-21.
- TDS on company dividends (Section 194): 10% if total dividend from one company exceeds Rs 10,000 in a financial year. Under the Income Tax Act 2025, this maps to Section 393 sub-clause.
- TDS on mutual fund dividends (Section 194K): 10% if total dividend/IDCW from one mutual fund exceeds Rs 10,000 in a financial year.
- NRI dividend TDS: 20% under Section 195, or a lower rate under the applicable DTAA (10-15% for most treaty countries) with Form 10F and a Tax Residency Certificate.
- Section 57 deduction: interest paid on money borrowed to buy the shares/units is deductible, capped at 20% of gross dividend income. No other expenses are deductible.
- Dividend income is reported under Income from Other Sources in Schedule OS of the ITR, with quarter-wise disclosure mandatory from AY 2026-27.
- If total tax liability (including on dividends) exceeds Rs 10,000, advance tax is due in quarterly instalments.
How are dividends taxed in India? Since FY 2020-21, dividends are taxed in the hands of the recipient at applicable slab rates, not at the company level. A salaried individual receiving Rs 80,000 in dividends from listed shares and mutual funds during FY 2025-26 will see 10% TDS deducted (if from a single source above Rs 10,000), can claim up to Rs 16,000 as Section 57 deduction if that much interest was paid on a margin loan, and will pay the balance tax at their marginal rate when filing the ITR.
Until March 2020, companies paid DDT at an effective rate of about 20.56% before distributing dividends. Shareholders received dividends tax-free up to Rs 10 lakh. The Finance Act 2020 dismantled this system entirely. From FY 2020-21 onward, the company distributes the full dividend amount, deducts TDS, and the shareholder pays income tax at their slab rate.
This shift means that a shareholder in the 30% bracket pays significantly more tax on dividends than under the old DDT system, while someone in the nil or 5% bracket pays less. It also means dividend income must be accurately tracked, disclosed in the ITR, and reconciled with AIS and Form 26AS entries.
This guide covers the complete dividend taxation framework for AY 2026-27 (FY 2025-26): tax rates, TDS provisions, deductions, NRI treatment, ITR reporting, and advance tax.
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Who Pays Tax on Dividends
The recipient of the dividend pays income tax. This applies to:
- Individuals receiving dividends from shares held in demat accounts
- Hindu Undivided Families (HUFs) holding shares
- Partnership firms and LLPs earning dividend income
- Companies (domestic and foreign) receiving inter-corporate dividends
- Trusts, AOPs, and BOIs holding equity investments
- NRIs receiving dividends from Indian companies or mutual funds
The company or mutual fund paying the dividend deducts TDS and deposits it with the government. The shareholder reports the gross dividend as income and claims credit for TDS deducted.
Tax Rate on Dividend Income
Dividends are classified as Income from Other Sources under the Income Tax Act. The tax rate depends on the recipient's status:
| Recipient | Tax rate on dividends |
|---|---|
| Individual / HUF (old regime) | Slab rates: nil / 5% / 20% / 30% based on total income |
| Individual / HUF (new regime, Section 115BAC) | Slab rates: nil / 5% / 10% / 15% / 20% / 25% / 30% |
| Partnership firm / LLP | 30% flat + 12% surcharge (if income above Rs 1 crore) + 4% cess |
| Domestic company | 22% (Section 115BAA) or 25% (Section 115BAB) or 30% depending on regime |
| NRI individual | Slab rates (same as resident), but often effectively 20% via TDS |
There is no special concessional rate for dividend income. It is added to total income and taxed at the marginal rate.
TDS on Dividends: Section 194 and Section 194K
Company Dividends: Section 194
When a domestic company declares a dividend, it must deduct TDS before payment.
| Parameter | Detail |
|---|---|
| Section | 194 (old Act) / Section 393 sub-clause (Income Tax Act 2025) |
| Rate | 10% |
| Threshold | Rs 10,000 per shareholder per financial year (raised from Rs 5,000 by Finance (No. 2) Act, 2024) |
| Without PAN | 20% (Section 206AA) |
| Applicable to | Resident individuals, HUFs, firms, companies |
If the total dividend paid by one company to one shareholder is Rs 10,000 or below during the financial year, no TDS is deducted.
Lower or nil TDS: Shareholders can submit Form 15G (below 60 years) or Form 15H (senior citizens) if their total income is below the taxable threshold, to avoid TDS on dividends. Alternatively, they can apply for a lower deduction certificate under Section 197 if their actual tax rate is lower than 10%.
Mutual Fund Dividends: Section 194K
When a mutual fund declares an Income Distribution cum Capital Withdrawal (IDCW), the fund house deducts TDS.
| Parameter | Detail |
|---|---|
| Section | 194K (old Act) / Section 393 sub-clause (Income Tax Act 2025) |
| Rate | 10% |
| Threshold | Rs 10,000 per mutual fund per financial year |
| Without PAN | 20% |
This applies to all mutual fund categories: equity, debt, hybrid, ELSS, and international funds. Only the IDCW option triggers TDS. Growth option units do not pay any dividend and are not affected.
NRI Dividends: Section 195
For Non-Resident Indians, TDS on dividends is deducted at 20% (plus surcharge and cess) under Section 195.
If a DTAA exists between India and the NRI's country of residence, the lower treaty rate applies. Common treaty rates:
| Treaty country | Dividend TDS rate |
|---|---|
| USA | 15% (25% for company holding 10%+ voting shares) |
| UK | 15% |
| UAE | 10% |
| Singapore | 10% (15% in some cases) |
| Canada | 15% |
To claim the treaty rate, the NRI must submit Form 10F and a Tax Residency Certificate (TRC) issued by the foreign country's tax authority to the company or its registrar before the dividend record date.
Section 57 Deduction: Interest on Borrowed Capital
If you borrowed money specifically to acquire the shares or mutual fund units from which you earn dividends, the interest paid on that loan is deductible under Section 57.
Critical cap: The deduction is limited to 20% of gross dividend income. No other expenses (brokerage, advisory fees, demat charges) are deductible against dividend income.
Worked Example
| Item | Amount |
|---|---|
| Gross dividend received during FY 2025-26 | Rs 2,00,000 |
| Interest paid on loan taken to buy shares | Rs 60,000 |
| Maximum deduction allowed (20% of Rs 2,00,000) | Rs 40,000 |
| Taxable dividend income | Rs 1,60,000 |
Even though Rs 60,000 interest was paid, only Rs 40,000 is deductible because of the 20% cap.
Important: The Finance Act 2026 has removed the Section 57 deduction for dividend income from FY 2026-27 (AY 2027-28) onwards. For AY 2026-27, the deduction is still available. Plan accordingly if you hold leveraged equity positions.
How to Report Dividend Income in Your ITR
Step 1: Identify All Dividend Sources
Check your Annual Information Statement (AIS) on the income tax portal. AIS lists every dividend payment reported by companies and mutual funds, along with TDS deducted. Cross-verify with:
- Dividend intimation emails from your broker/depository
- Mutual fund account statements (CAS from CAMS/KFintech)
- Form 26AS for TDS credit
Step 2: Report in Schedule OS
Dividend income goes under Income from Other Sources in Schedule OS of the ITR form.
- ITR-1 (Sahaj): Report total dividend under "Income from Other Sources." Quarter-wise breakup is required from AY 2026-27.
- ITR-2: Use Schedule OS, Part A, row for "Dividends" with quarter-wise amounts.
- ITR-3: Same as ITR-2 if you also have business income.
Step 3: Claim Section 57 Deduction
If applicable, declare the interest on borrowed capital in Schedule OS and compute the allowable deduction (20% cap).
Step 4: Claim TDS Credit
Verify that TDS deducted on dividends appears in Form 26AS / AIS. Claim credit under Schedule TDS in the ITR.
Quarter-Wise Disclosure
From AY 2026-27, the ITR requires dividend income to be split into four quarters:
| Quarter | Period |
|---|---|
| Q1 | April to June |
| Q2 | July to September |
| Q3 | October to December |
| Q4 | January to March |
This aligns with advance tax instalments and allows the CPC to verify TDS entries against the correct quarter.
Advance Tax on Dividend Income
If your total tax liability for the year (after TDS) exceeds Rs 10,000, you must pay advance tax. Dividend income, being unpredictable, is subject to a special provision:
- If dividend income arises after a particular advance tax instalment due date, no interest under Section 234C is charged for that instalment.
- You must pay the advance tax for the remaining instalments after receiving the dividend.
| Instalment | Due date | Cumulative tax payable |
|---|---|---|
| 1st | 15 June | 15% of estimated tax |
| 2nd | 15 September | 45% |
| 3rd | 15 December | 75% |
| 4th | 15 March | 100% |
Senior citizens (60+) without business or profession income are exempt from advance tax under Section 207.
Dividend from Foreign Companies
If you hold shares of a foreign-listed company (US stocks, UK stocks) and receive dividends:
- The dividend is still taxable as Income from Other Sources in India.
- No TDS is deducted in India since the payer is a foreign entity.
- The foreign country may withhold tax at source (e.g., the US withholds 25% on dividends to Indian residents, reducible to 15% under the India-US DTAA).
- Claim Foreign Tax Credit via Form 67 filed before the ITR due date. Report the income in Schedule FSI and the credit in Schedule TR.
- If you hold foreign shares, Schedule FA (Foreign Assets) is mandatory in ITR-2/ITR-3.
Dividend Reinvestment Plans (DRIP)
Some companies offer DRIPs where the dividend is automatically reinvested to buy additional shares. Even though you do not receive cash:
- The dividend is still taxable as income in the year it is declared.
- The reinvested shares have a cost of acquisition equal to the dividend amount used to purchase them.
- TDS is still deducted by the company on the declared dividend, not on any reinvested amount.
Common Mistakes to Avoid
- Not reporting mutual fund IDCW: Many investors assume IDCW is the same as "growth" and do not report it. Every IDCW payment is a taxable dividend.
- Ignoring AIS mismatch: If AIS shows a dividend you did not track, it will trigger a mismatch notice under Section 143(1). Reconcile before filing.
- Claiming more than 20% deduction: The Section 57 cap at 20% of gross dividend is strict. Claiming the full interest paid on a margin loan will result in a disallowance.
- Missing advance tax on large dividends: A special dividend of Rs 5 lakh from a single stock can create a significant advance tax liability. Pay within the quarter of receipt.
- NRIs not filing Form 10F: Without Form 10F and TRC, the company will deduct TDS at 20% instead of the lower DTAA rate. This can be recovered via ITR filing, but ties up capital.
Summary: Dividend Tax at a Glance
| Aspect | Detail |
|---|---|
| Taxable head | Income from Other Sources |
| Tax rate | Slab rates (individual) / 30% (firm) / corporate rates (company) |
| TDS: company dividend (Section 194) | 10% above Rs 10,000 per company per year |
| TDS: mutual fund IDCW (Section 194K) | 10% above Rs 10,000 per fund per year |
| TDS: NRI (Section 195) | 20% (or lower DTAA rate) |
| Section 57 deduction | Interest on borrowed capital, max 20% of gross dividend |
| ITR schedule | Schedule OS (Income from Other Sources) |
| Advance tax | Required if total tax liability exceeds Rs 10,000 |
| IT Act 2025 mapping | Sections 194/194K map to Section 393 sub-clause |
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Frequently Asked Questions
Is dividend income taxable in India?
Yes. Since FY 2020-21, all dividend income from Indian companies and mutual funds is taxable in the hands of the recipient at applicable slab rates. The old Dividend Distribution Tax (DDT) paid by companies was abolished by the Finance Act 2020.
What is the TDS rate on dividend income?
For residents, TDS is 10% under Section 194 (company dividends) and Section 194K (mutual fund IDCW), applicable when the total dividend from one source exceeds Rs 10,000 in a financial year. For NRIs, TDS is 20% under Section 195, or a lower rate under the applicable DTAA.
Can I claim any deduction against dividend income?
Yes, under Section 57 you can deduct interest paid on money borrowed to acquire the shares or mutual fund units. The deduction is capped at 20% of gross dividend income. No other expenses (brokerage, demat charges, advisory fees) are deductible. This deduction is available for AY 2026-27 but has been removed from AY 2027-28 onwards.
How do I report dividend income in my ITR?
Report it under Income from Other Sources in Schedule OS. From AY 2026-27, quarter-wise disclosure is required. Verify your entries against AIS and Form 26AS. Claim TDS credit in Schedule TDS.
Do I need to pay advance tax on dividend income?
If your total tax liability for the year exceeds Rs 10,000 after accounting for TDS, you must pay advance tax. Dividend income received after an instalment due date does not attract Section 234C interest for that specific instalment.
What if I receive dividends from foreign stocks?
Foreign dividends are taxable in India under Income from Other Sources. If the foreign country withheld tax, claim Foreign Tax Credit by filing Form 67 before the ITR due date. You must also disclose the foreign shares in Schedule FA of ITR-2 or ITR-3.
Is mutual fund growth option taxable as dividend?
No. The growth option does not distribute any income. Only the IDCW (Income Distribution cum Capital Withdrawal) option generates dividend payments that are subject to TDS and income tax. Growth option gains are taxed as capital gains only when you redeem units.
Can I avoid TDS on dividends using Form 15G or 15H?
Yes. If your total income is below the taxable threshold, submit Form 15G (below 60 years) or Form 15H (senior citizens) to the company or mutual fund. This is valid only for residents. Alternatively, apply for a lower deduction certificate under Section 197 if your actual tax rate is below 10%.
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Sources
This guide is verified against incometax.gov.in/iec/foportal/ (Section 194 and 194K TDS provisions, Section 57 deduction limits, Section 115BBDA abolition), the Finance Act 2020 (DDT abolition and shift to classical taxation), Finance (No. 2) Act 2024 (threshold increase from Rs 5,000 to Rs 10,000 for Sections 194 and 194K), Finance Act 2026 (removal of Section 57 deduction for dividend income from AY 2027-28), the Income Tax Act 2025 (Section 393 consolidated TDS mapping), CBDT guidelines on advance tax computation for unpredictable income, and confirmatory coverage from ClearTax (dividend TDS guide), Tax2Win (dividend income tax guide 2026), and Bajaj Finserv (tax on dividend income FY 2026-27). All rates and thresholds reflect the provisions applicable for FY 2025-26 (AY 2026-27).
