Taxation of Dividend Income in India: Rules, TDS & Everything Investors Need to Know

Dividend income is a rewarding source of earnings for investors apart from capital gains. With the abolition of Dividend Distribution Tax (DDT), the responsibility of paying tax on dividends now lies with investors, making it part of their taxable income. Understanding the taxation of dividend income is essential for every investor, whether earnings flow through a trading account or accumulate in a demat account. TDS applies beyond prescribed limits, investors can claim specific deductions by making proper reporting in ITR necessary for tax compliance and planning.

What is the Budget 2026 Update?

A significant change has been introduced in Budget 2026 that directly impacts the taxation of dividend income. No interest deduction will be allowed against dividend income going forward. The 20% interest deduction that was previously available to investors will be revoked with effect from the tax year 2026-27. This is a crucial development for investors tracking dividend income tax India, as it eliminates one of the key deductions that were available under the earlier framework.

Dividend Received From an Indian Company

For investors in equity shares, dividends received from Indian companies represent a significant income stream alongside capital gains. In the current framework governing taxation of dividend income, such dividends are taxed in the hands of investors, and not the company distributing them.

Dividend income should be disclosed under “Income from Other Sources” in the investor’s Income Tax Return and is taxed at the respective slab rates. This applies to dividend income in demat account taxation, any dividend credited to your demat account is taxable income in the year of receipt.

If the dividend received from a company during a financial year is more than ₹ 10,000, the company has to deduct TDS @ 10% as per Section 194 of the Income Tax Act before crediting the amount. This is quite relevant in the context of tax on dividend income in trading account holdings, where the dividends are routed through the broker’s system before reaching the investor.

Old vs New Provision for Taxability of Dividend Income

The framework governing taxation of dividend income has undergone a fundamental shift in recent years. Updates are essential for any investor navigating dividend income tax India.

• Up to 1st April 2020: Investors did not have to pay any tax on dividends received from Indian companies. This is because the distributing company has already paid Dividend Distribution Tax (DDT) before making the payment. Therefore, such dividends were not taxable in the hands of investors till FY 2019-20.
• From 1st April 2020: This has been completely changed by the Finance Act, 2020 w.e.f. 1st April 2020 All dividends received on or after 1 April 2020 are now fully taxable in the hands of the investor or shareholder at the applicable income tax slab rates under the new regime. At the same time, withdrawal of DDT liability on companies and mutual funds was done. The earlier provision of Section 115BBDA providing for taxation of 10% on dividend receipts in excess of ₹10 lakh for resident individuals, HUFs and firms was also withdrawn.

This shift placed the full responsibility of dividend income tax India on individual investors, making accurate reporting and advance tax planning more important than ever.

TDS on Dividend Income

The Finance Act, 2020 has introduced TDS provisions on dividend distributions by companies and mutual funds and are applicable on all dividends paid on or after 1 April 2020. Dividend amount above Rs. 10,000 from one company/mutual fund in a financial year is subject to TDS of 10%. Please note that this threshold was ₹5,000 till FY 2024-25 which is now revised upwards.

Sample Illustration:

Mr. Raj had received a dividend of ₹16,000 from an Indian company on 15 June 2025. The company deducts TDS @ 10% if his dividend income crosses ₹10,000 which works out to be ₹1,600 (₹16,000 × 10%). Mr. Raj receives the balance amount of ₹14,400 (₹16,000 − ₹1,600). The gross dividend of ₹16,000 is part of Mr. Raj’s taxable income for FY 2025-26 (AY 2026-27), and is taxed at his slab rate. Here is an easy example of how tax on dividend income in trading account or demat holdings works in real life.

TDS for Non-Residents:

For NRI investors, the TDS on dividend income is deducted at 20%, subject to the provisions of any Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of the investor. To receive the benefit of lower treaty rate, the NRI is required to show documentary evidence including Form 10F, declaration of beneficial ownership and certificate of tax residency. In absence of such documents TDS will be deducted at a higher rate, but the excess can be claimed as a refund at the time of filing the ITR.

This is especially true for non-resident investors when it comes to the dividend income in demat account taxation, as the rates are very different from those that apply to resident investors.

Also Read: What are the Different Types of Dividends?

Deduction of Expenses from Dividend Income

Currently, investors are permitted an interest deduction of up to 20% of gross dividend income against their dividend earnings. Which means that if an investor has borrowed to invest in shares or mutual funds, the interest paid on that can be set off partly against dividend income, but only to the extent of the 20% ceiling.

However, as stated in the Budget 2026 update, this deduction will be wholly withdrawn from the tax year 2026-27 onwards. Dividend income will not be allowed to have any deduction in the future, whether for interest expense or any other cost. Investors currently factoring this deduction into their dividend income tax India calculations must revise their tax planning accordingly.

Submission of Form 15G/15H

An investor, whose estimated annual income is below the basic exemption limit, can avoid TDS on dividends by submitting the declaration forms to the company or the mutual fund.

• Form 15G is for resident individuals whose estimated total income during the year is below the taxable limit. By submitting this form, the investor represents that his/her income is not taxable and the company is not liable to deduct TDS.
• Form 15H is for senior citizens who have estimated tax payable for the year as zero.

When a company or mutual fund declares a dividend, they usually email the registered email ID of the shareholders asking them to submit Form 15G or Form 15H, if applicable. One important aspect for investors managing tax on dividend income in trading account or demat account setups is that the full dividend amount is only credited to avoid any TDS deduction if the submission is made on time.

Advance Tax on Dividend Income

We discuss the effect of taxation of dividend income on advance tax compliance. In case of an investor, if the total tax liability for a financial year is ₹10,000 or more, then the provisions of advance tax are applicable and dividend income is considered for this calculation.

Interest and penalties under the Income Tax Act are levied for failure to deposit advance tax in time, or for depositing less than the required amount. Before we discuss dividend income in demat account taxation exposure, let’s understand the advance tax instalments for investors receiving significant dividends. The advance tax instalments are on 15 June, 15 September, 15 December and 15 March of the relevant financial year.

Dividend Received From a Foreign Company

In India, dividend income from foreign companies is also taxed on taxation of dividend income. Such income comes in “Income from Other Sources” and is added to the total income of the investor and taxed at the rates applicable to the investor’s income slab. If the investor comes in a 30% tax bracket, the foreign dividends are taxed at 30% with applicable cess.

The deduction for interest expense is limited to 20% of gross dividend income, being also applicable to foreign dividends under the same conditions. However, this deduction will be withdrawn from FY 2026-27 as part of Budget 2026 changes.

Here section 194 of Income Tax Act is also applicable with respect to TDS. 10% TDS is applicable on dividend income above ₹10,000 for resident individuals. If the PAN details are not submitted by the recipient, 20% TDS is applicable.

Relief from Double Taxation

A dividend received from a foreign company is liable to be taxed in India and also in the country where the foreign company is situated. This may lead to double taxation of the same income. Indian tax law therefore provides relief to this effect by way of two routes:

• DTAA Relief: In cases where India has a Double Taxation Avoidance Agreement with the foreign company’s country of domicile, the investor can claim relief under the provisions of this treaty. Usually, this brings down the effective tax rate on the foreign dividend.
• Section 91 Relief: In the absence of a DTAA between India and the relevant country, the investor can avail unilateral relief under Section 91 of the Income Tax Act.

In either case the investor is protected from paying full tax on the same income in two jurisdictions, an important safeguard given the trend of Indian investors holding foreign equity through trading and demat accounts.

Conclusion

Since the abolishment of DDT in 2020, the taxation of dividend income in India has changed considerably and the full tax liability lies with investors now. The taxability, calculation and payment of dividend income whether it is in a demat account through equity holdings or in a trading account through mutual fund distributions, is entirely your own responsibility. Never has it been more important to know dividend income tax India with Budget 2026 removing the 20% interest deduction and tightening the rules further. Proactive tax planning, timely advance tax payments, timely submission of Form 15G/15H wherever applicable and accurate reporting in your ITR are the only ways to be compliant and optimize your post-tax returns from dividend income.