Key Highlights
- Dividend income: taxable at individual slab rate (not a flat rate)
- TDS on dividend from Indian company: 10% under Section 393 of ITA 2025 (if >Rs 5,000/year)
- TDS on dividend to non-resident: 20% (Section 396)
- Deduction allowed: Interest expense to earn dividend — up to 20% of dividend income
- No other deduction allowed against dividend income
- Section 157 rebate: applies if total income (including dividend) is within Rs 12 lakh
- Dividend from foreign companies: taxable at slab rate, with foreign tax credit under Section 213
1. History: From DDT to Taxable Dividend
Prior to Budget 2020, companies paid Dividend Distribution Tax (DDT) at 15% (plus surcharge and cess) and dividends were exempt in shareholders hands. Finance Act 2020 abolished DDT effective 1 April 2020, shifting tax incidence to the shareholders. Dividends are now part of total income and taxed at slab rate. This change continues under ITA 2025.
2. TDS on Dividend Under Section 393
| Recipient | TDS Rate | Threshold |
|---|---|---|
| Resident individual / HUF | 10% | More than Rs 5,000/year from one company |
| Resident company / firm | 10% | More than Rs 5,000 |
| NRI / foreign company | 20% (or DTAA rate if lower) | No threshold |
| Section 197 lower TDS certificate holder | Lower rate as per certificate | — |
3. Deduction Against Dividend Income
The only deduction allowed against dividend income under ITA 2025 is interest on money borrowed to invest in the shares or mutual funds that generated the dividend. This deduction is capped at 20% of dividend income — so if you earn Rs 1 lakh in dividends, maximum interest deduction is Rs 20,000. No other expense (brokerage, advisory fees) is deductible against dividend income.
4. Dividend Income Computation Example
Illustrative only. Mohan receives dividends of Rs 80,000 from Indian companies and Rs 20,000 from a US company. He has taken a loan for shares, paying Rs 25,000 interest.
- Total dividend = Rs 1,00,000
- Deduction: interest = Rs 25,000 but capped at 20% of Rs 1L = Rs 20,000
- Net dividend income = Rs 80,000
- Tax at slab rate (say 20%) = Rs 16,000 + cess
- TDS already deducted (10% on Rs 80K Indian dividends) = Rs 8,000 — claimed as credit
5. Dividend from Foreign Companies
Dividends received from foreign (non-Indian) companies are taxed at the recipient slab rate in India as "Income from Other Sources." No TDS is deducted by the foreign company in India. However, if the foreign country has deducted withholding tax, the taxpayer can claim foreign tax credit under Section 213 of ITA 2025 (Form 67 must be filed before ITR due date). DTAA may reduce the effective double taxation.
6. Dividend REINVESTMENT Plans (DRIPs)
When mutual funds declare dividends that are reinvested under a DRIP (or growth plan), there is no taxable event at the time of reinvestment — it is treated as a fresh investment. Tax arises only when units are redeemed. This is why growth option mutual funds are more tax-efficient than dividend payout options for long-term investors.
7. Why TaxClue
Dividend income from multiple companies, foreign dividends, and REIT distributions must all be correctly reported in the ITR with TDS credits. TaxClue ensures comprehensive and accurate dividend income reporting. Contact us for income tax filing under ITA 2025.