Market data · delayed NIFTY 50 Loading SENSEX Loading BANK NIFTY Loading USD/INR Loading
GALE.IN INDIAN EQUITY RESEARCH

Home › Guides

Tax on Dividend Income in India: Slab Rates, TDS and the One Deduction Allowed

By Vinoth Kanna Published 7 min read Guides · Taxation

Until 2020, dividends reached you tax-free. The company paid Dividend Distribution Tax before distributing, and what landed in your account was yours. The Finance Act, 2020 reversed that: DDT was abolished, and dividends became taxable in the hands of the recipient.

That single change altered who bears the tax, at what rate, and — most consequentially — whether the rate depends on who you are. It does. This chapter covers the mechanism as it now works.

The structure after 2020

Three facts define the current regime:

  1. Dividends are taxed as income in your hands, under the head “Income from Other Sources”, at your applicable slab rate.
  2. There is no DDT. The company distributes the full declared amount, subject only to TDS.
  3. TDS applies under Section 194 for resident shareholders, above a threshold, and is adjustable against your final liability.

The practical effect is that the tax rate on a dividend is no longer a property of the share. It is a property of the shareholder. A ₹10,000 dividend costs a person in the highest slab roughly three times what it costs someone in the lowest — on the same stock, declared on the same day.

This is the core difference from the pre-2020 position, where DDT was levied at a flat company-level rate and every shareholder bore it equally regardless of income.

How TDS works

The company deducts tax at source before paying you, under Section 194, once your dividend from that company in a financial year crosses a specified threshold.

  • Rate: 10% for resident shareholders who have furnished a valid PAN.
  • Without a valid PAN: a higher rate applies under Section 206AA.
  • Threshold: a per-company, per-financial-year limit. This figure has been revised upward by recent Finance Acts, so check the current year’s limit rather than relying on a remembered number.

Two features of the threshold are worth being precise about, because both cause surprises:

It is per company, not per portfolio. Dividends from twelve different companies, each below the threshold, attract no TDS at all — while the total is fully taxable in your return. People who hold a diversified portfolio often receive no TDS whatsoever and then find a substantial dividend liability at filing time.

TDS is not the tax. It is an advance collection at a flat 10%. Your actual liability is at your slab rate. If you are in a 30% bracket, the 10% deducted covers a third of what you owe and the balance is payable by you. If you are below the taxable threshold entirely, the 10% deducted is refundable.

Treating TDS as settlement is the most common dividend tax error, and it runs in both directions.

The one deduction you are allowed

Under the pre-2020 regime the question did not arise. Now it does, and the answer is narrow.

Interest on money borrowed to invest in the shares is deductible against dividend income — capped at 20% of the dividend income for the year.

Nothing else is allowed. Not demat charges, not brokerage, not advisory fees, not depository annual maintenance. Section 57 permits the interest deduction and expressly excludes other expenses in relation to dividend income.

So if you received ₹50,000 in dividends and paid ₹30,000 in interest on a loan taken to buy those shares, your deduction is capped at ₹10,000 — 20% of ₹50,000 — and the remaining ₹20,000 of interest is simply not deductible anywhere.

Avoiding TDS when you are below the taxable limit

If your total income for the year will be below the taxable threshold, having 10% withheld and then claiming it back as a refund is a cash-flow cost for no reason. Two forms prevent it:

  • Form 15G — for resident individuals below 60, declaring that their estimated total income is nil-tax.
  • Form 15H — for resident individuals aged 60 and above, same purpose.

These are submitted to each company or its registrar, not to the Income Tax Department, and they must be submitted fresh each financial year. Submit them before the record date for a declaration, not after, because TDS is deducted at payment and cannot be reversed by a later filing.

Most registrars — KFin, Link Intime, and the others — accept these electronically through their investor portals. Our page on dividend record dates explains the record-date timing you are working against.

A declaration made when you are in fact liable to tax carries penal consequences. These forms are for genuine nil-tax cases, not for deferral.

Advance tax

Dividend income counts towards your advance tax obligation like any other income. Because dividends are lumpy and unpredictable in timing, this creates a specific difficulty: you may not know in September what you will receive in March.

The law accommodates this partially. Interest under Section 234C for shortfall in an advance tax instalment is not levied on dividend income that was simply not foreseeable at the instalment date, provided the tax on it is paid in the remaining instalments once received.

The practical approach is to pay the tax on a dividend in the instalment following its receipt, rather than attempting to forecast declarations in advance.

What is not a dividend for this purpose

Three cases that look similar and are taxed differently:

Buybacks. Historically taxed at the company level, buyback proceeds have been brought within dividend treatment for the shareholder by recent amendments. The treatment has changed more than once; confirm the position for the year in which you received the proceeds.

Mutual fund distributions. An equity fund’s income distribution is taxed in the same slab-rate manner as a dividend, with TDS under Section 194K rather than 194. The underlying fund itself pays no tax on dividends it receives from its holdings. Our guide to index funds in India covers how that fund-level exemption interacts with tracking.

Bonus shares. Not a dividend and not income. A bonus issue is a capitalisation of reserves — you receive more shares, each worth proportionately less, and there is no taxable event until you sell. Our page on bonus issue versus stock split covers the mechanics, and the cost-basis treatment on eventual sale is in our LTCG guide.

NRI shareholders

The position differs in three ways:

  • TDS rate: 20% plus applicable surcharge and cess, under Section 195, rather than 10%.
  • No threshold: TDS applies from the first rupee. There is no minimum below which it is not deducted.
  • Treaty relief: where a Double Taxation Avoidance Agreement provides a lower rate, that rate can be claimed — but only on furnishing a Tax Residency Certificate and Form 10F to the company or its registrar before payment.

Many DTAAs cap dividend withholding at 10% or 15%. The difference between 20% and a treaty rate is claimable as a refund if the documentation was not filed in time, but the refund cycle is long. Filing the TRC and Form 10F with each registrar ahead of the record date is the cheaper route.

A worked example

A resident individual in the 30% slab receives dividends from three companies in a financial year: ₹40,000, ₹8,000 and ₹6,000. Assume the per-company TDS threshold for the year is ₹10,000.

  • Company 1: ₹40,000 exceeds the threshold → TDS at 10% = ₹4,000. Received: ₹36,000.
  • Company 2: ₹8,000, below the threshold → no TDS. Received: ₹8,000.
  • Company 3: ₹6,000, below the threshold → no TDS. Received: ₹6,000.

Total dividend income: ₹54,000. Total TDS deducted: ₹4,000.

Tax liability at 30% (plus cess) on ₹54,000 is roughly ₹16,850. Against ₹4,000 already deducted, the balance of about ₹12,850 is payable by the shareholder.

Had the same ₹54,000 arrived from a single company, TDS would have been ₹5,400 — a different advance collection on an identical liability. The threshold changes the timing, never the total.

The honest summary

Dividends are now ordinary income taxed at your slab rate, with a 10% advance collection that is per company and that most portfolios partly escape. The gap between what is withheld and what is owed is the whole administrative problem: diversified holders receive little or no TDS and carry a real liability into their return.

Three things to act on. Know that the threshold is per company, so no TDS does not mean no tax. File 15G or 15H before the record date if you are genuinely below the taxable limit, not after. And remember the only deduction available is borrowing interest, capped at 20% of the dividend — every other cost of holding the shares is non-deductible.

Rates, thresholds and the buyback treatment have all been amended since 2020. The mechanism described here is structural; verify the year’s specific figures against the current Finance Act before filing.

Dividend TaxTDSSection 194Form 15GTaxationDividends