Dividend income represents a return on equity investment and is taxable in India based on the nature of the dividend, residential status of the recipient, and the status of the payer. After abolition of the Dividend Distribution Tax (DDT) regime, dividends are now taxed in the hands of shareholders.
This article explains the current legal framework as applicable up to FY 2025-26, including chargeability, timing, rates, deductions, withholding tax, inter-corporate relief, deemed dividends, foreign dividends, buyback taxation, and double taxation relief.
1. Chargeability of Dividend Income
Dividend income is taxable in the hands of the shareholder under the head “Income from Other Sources”, except where:
- Shares are held as stock-in-trade, or
- Dividend is attributable to a Permanent Establishment (PE) in India, in which case it may be taxed as Business Income.
Dividends declared, distributed, or paid on or after 1 April 2020 are taxable in the hands of the recipient.
2. Year of Taxability
- Final dividend: Taxable in the year in which it is declared at the Annual General Meeting, when the right to receive becomes vested.
- Interim dividend: Taxable in the year in which it is unconditionally made available to the shareholder.
- Deemed dividend: Taxable in the year of distribution or payment.
3. Rates of Tax on Dividend Income
(A) Resident Assessees
Dividend income is taxable at normal slab rates applicable to the assessee.
(B) Special Rates for Certain Categories
| Section | Category | Nature of Dividend | Rate |
|---|---|---|---|
| 115AC | Non-resident | Dividend on GDRs of Indian company/ PSU (foreign currency) | 10% |
| 115AD | FII/ FPI | Dividend from securities | 20% |
| 115E | NRI | Dividend from shares purchased in foreign currency | 20% |
| 115A | Non-resident/ foreign company | Dividend (other cases) | 20% |
| 115A | Non-resident/ foreign company | Dividend from IFSC units | 10% |
Surcharge and health & education cess apply as per law. Where dividend is taxed under section 115A, surcharge is capped at 15%.
4. Deduction Against Dividend Income – Section 57
From AY 2021-22 onwards, deduction against dividend income is restricted:
- Only interest on borrowed capital used for investment in shares is allowable.
- Deduction is capped at 20% of dividend income.
- No other expenditure is permitted.
Where dividend is taxed on a gross basis under special provisions applicable to non-residents, deductions are not available.
5. Inter-Corporate Dividend Deduction – Section 80M
Domestic companies can claim deduction under section 80M to avoid cascading taxation:
- Dividend must be further distributed by the recipient company.
- Deduction limited to the amount of dividend distributed.
- Distribution must be made within the prescribed time.
This provision is critical for group structures and holding companies.
6. Deemed Dividend – Section 2(22)(e)
Loans or advances by closely held companies may be treated as dividend where:
- Paid to shareholders holding 10% or more voting power, or
- Paid to concerns in which such shareholders have substantial interest.
Key points:
- Taxable in the hands of the shareholder
- Restricted to accumulated profits
- Trade advances excluded
- No TDS applies
This remains a high-litigation area.
7. Tax Deduction at Source (TDS)
(A) Dividend to Resident Shareholders – Section 194
- Up to FY 2024-25:
TDS @ 10% where dividend exceeds ₹5,000 in a financial year - From FY 2025-26 onwards (w.e.f. 1 April 2025):
TDS @ 10% where dividend exceeds ₹10,000 in a financial year
PAN is mandatory; higher TDS applies in absence of PAN.
(B) Dividend to Non-Residents – Section 195
- TDS at 20% or DTAA rate, whichever is beneficial
- Lower or nil deduction possible through section 197
- DTAA conditions must be satisfied
8. Dividend from Foreign Companies
(A) Recipient Resident in India
- Taxable under “Income from Other Sources”
- Taxed at applicable slab rates
- Foreign tax credit available under Rule 128
- Disclosure required in Schedule FSI and TR
(B) Recipient Non-Resident / Foreign Company
- Dividend from Indian company deemed to accrue in India
- Taxable at 20% plus surcharge and cess
- DTAA relief available
- If attributable to PE in India, taxable as business income
9. Buyback of Shares Treated as Dividend
Recent amendments effective October 2024 have expanded the scope of dividend to include certain buyback transactions, shifting tax incidence from the company to shareholders in specified cases.
These changes significantly impact capital distribution strategies and require careful evaluation of tax consequences in buyback scenarios.
10. Relief from Double Taxation
Where dividend income is taxed in more than one country:
- Relief available under applicable DTAA, read with the Multilateral Instrument
- In absence of DTAA, unilateral relief available under section 91
Conclusion
Dividend income is now firmly taxed in the hands of shareholders, with limited deductions and enhanced compliance requirements. Accurate application of tax rates, TDS provisions, section 80M relief, and treaty benefits is essential to prevent excess tax cost and disputes. Recent changes relating to TDS thresholds and buyback taxation further underline the need for continuous monitoring of dividend-related tax provisions.