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How dividend tax works for an Indian shareholder
Dividend income is taxed in the hands of the person who receives it, under the head Income from Other Sources. The Income Tax Department states that it is taxable in the year in which it is declared, paid or distributed. An interim dividend is normally taxed when it is unconditionally made available to the shareholder.
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For ordinary shares held by a resident individual, the dividend is added to other taxable income and taxed at the applicable income-tax slab rate. The company’s TDS is only an advance collection of tax. It does not determine the final liability shown in your income-tax return.
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- Final dividend: include it in the year in which it is declared, paid or distributed, according to the applicable rule.
- Interim dividend: include it when the amount is unconditionally made available to you.
- Gross amount: report the dividend before TDS, not merely the amount credited to your bank account.
Illustrative calculation
Suppose a resident investor receives a ₹100,000 ordinary-share dividend and the company deducts ₹10,000 as TDS. The investor reports ₹100,000 as dividend income. The ₹10,000 appears as tax credit, subject to matching tax records. If the investor’s applicable tax rate is higher than 10%, additional tax may be payable; if the final liability is lower, the excess can generally be adjusted through the return.
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Is TDS deducted on dividends?
Yes. Section 194 requires an Indian company to deduct 10% TDS from a dividend paid or distributed to a resident shareholder. The rate applies to the dividend amount covered by the provision and is a withholding rate, not a separate final dividend tax.
The ₹5,000 exception for individuals
For an individual shareholder, the company need not deduct TDS when both conditions are met:
- The dividend is paid through a mode other than cash; and
- The aggregate dividend paid or credited by that company during the financial year is ₹5,000 or less.
The threshold is calculated company-by-company for the financial year. Dividends from different companies are not combined for this particular section 194 exception.
A payment that qualifies for the exception can arrive without TDS, but it remains taxable income. Conversely, TDS can be deducted even though your eventual tax bill is lower or nil after considering your total income, deductions and applicable slab.
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Why the bank credit can differ from the dividend declared
When TDS applies, the bank receives the dividend after withholding. Corporate actions may also involve separate credits, multiple dividend payments or different deductors. Keep the dividend advice or broker statement alongside the TDS evidence so that the gross amount and tax credit can be reconciled.
How resident dividend income is taxed in the return
Slab-rate taxation
Ordinary share dividends received by a resident are normally taxed at the individual’s applicable slab rate. The relevant slab depends on the tax regime chosen, total income and other provisions for the assessment year. Dividend TDS at 10% does not convert the income into a flat 10% tax item.
Deduction for interest on borrowed money
Interest paid on money borrowed to earn dividend income can be deducted, but only up to 20% of the dividend income. For example, if dividend income is ₹100,000, the allowable interest deduction cannot exceed ₹20,000. The limit applies to interest; other expenses incurred in earning the dividend are not deductible under this rule.
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Expenses that cannot be deducted
Brokerage, portfolio-management charges, collection charges, bank fees and other expenses are not deductible against ordinary dividend income merely because they relate to holding or collecting the shares. Do not reduce the dividend reported in the return by these amounts.
Resident and non-resident shareholders: key differences
Your residential status and the type of security can change the withholding and final tax treatment. The following comparison covers the principal categories identified in current Income Tax Department guidance.
| Situation | Withholding or tax approach | Important qualification |
|---|---|---|
| Resident individual, ordinary shares | Normally 10% TDS under section 194; final tax at applicable slab rate | Individual non-cash dividend exception applies when the aggregate from that company in the financial year is ₹5,000 or less |
| Non-resident, ordinary dividend | AY 2026-27 TDS table lists 20% under section 195 | A valid tax treaty (DTAA) claim may provide a different final rate, subject to treaty conditions and documentation |
| Dividend from an IFSC unit | AY 2026-27 TDS table lists 10% | Confirm that the payment qualifies as an IFSC-unit dividend under the applicable provision |
| GDRs, FPIs and foreign-exchange assets | Special statutory rates may apply | Security type, holder category and the specific provision determine the rate |
| REITs or InVITs | Separate pass-through or exemption provisions can apply | Tax depends on the nature of income distributed and the investor category |
| AIF distributions | Separate pass-through rules may apply | Review the fund statement and the character of each distributed income component |
The 20% and 10% figures in this table are withholding figures listed for AY 2026-27 categories. A non-resident should not assume that the withholding rate is the final treaty or domestic tax rate. Treaty relief generally requires eligibility, a tax-residency certificate and other prescribed information.
Deemed dividends and special dividend categories
Not every amount treated as a dividend arrives as a conventional cash dividend. The department identifies deemed-dividend categories that include certain asset releases, specified distributions, loans or advances to specified shareholders or concerns, and the buy-back-related category described in section 2(22)(f).
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For the deemed-dividend category under section 2(22)(f), the department states that the interest deduction described for ordinary dividend income is not available. Do not apply the 20% interest limit to this category as if it were an ordinary share dividend.
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Amounts excluded from deemed-dividend treatment
Current guidance lists exclusions that include bonus shares issued to equity shareholders and certain distributions connected with a demerger. The legal result depends on the exact transaction, so retain the company’s corporate-action documentation rather than classifying an unusual receipt from its description alone.
What changes under the Income-tax Act, 2025?
The transition depends on the date the amount is paid or credited:
| Payment or credit date | Applicable framework for the TDS event |
|---|---|
| On or before 31 March 2026 | Income-tax Act, 1961 rules govern the TDS event |
| On or after 1 April 2026 | Income-tax Act, 2025 applies |
The Income Tax Department’s transition guidance says TDS obligations continue to be governed by the Act applicable to the financial year in which the sum is paid or credited. Former TDS sections 192 to 194T are consolidated mainly into sections 392 and 393 under the 2025 Act, while rates and thresholds are largely unchanged.
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Therefore, a dividend declared earlier is not automatically governed by the new Act. Check the actual payment or credit date recorded by the company and the section quoted on its TDS certificate or statement.
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How to report dividends and claim TDS in your ITR
- Collect payment evidence. Download dividend statements from each company or your broker. Obtain Form 16A where it is issued.
- Check AIS and Form 26AS. The Annual Information Statement (AIS) can show dividend and other reported information. Form 26AS focuses on TDS and tax-collection entries. Compare both with your statements.
- Report gross dividend income. In the applicable income-from-other-sources schedule of your ITR, enter the dividend before TDS. Use the income category matching the security or distribution.
- Enter eligible interest deduction. If you borrowed money to earn the dividend, claim only the permitted interest amount, capped at 20% of dividend income. Do not claim unrelated expenses.
- Claim the TDS credit. Use the TDS amount reflected in Form 26AS/AIS and supported by the deductor’s records. The credit reduces tax payable; it does not reduce the dividend income reported.
- Resolve mismatches before filing. If the company statement differs from AIS or 26AS, contact the reporting company or deductor for correction and keep the dividend advice, bank entry and correspondence.
Example of the reconciliation process
Assume a company statement shows ₹50,000 gross dividend and ₹5,000 TDS, but your bank shows ₹45,000. Report ₹50,000 as income and claim ₹5,000 as TDS only if that amount is reflected and supported in the tax records. The ₹45,000 bank credit is the net receipt, not the taxable amount.
Domestic companies and section 80M
A domestic company receiving dividends may be able to claim relief under section 80M when it redistributes qualifying dividends within the statutory timing condition. This is a corporate provision, not a deduction available to an individual investor. The recipient company must track the qualifying dividend and redistribution dates and meet the section’s conditions.
Common mistakes and how to correct them
- Treating ₹5,000 as a tax-free allowance: The amount only determines whether a particular individual-shareholder TDS exception applies.
- Reporting the net bank credit: Enter the gross dividend and claim the matched TDS separately.
- Assuming 10% TDS is final tax: Recalculate the income at your applicable slab rate when preparing the return.
- Claiming every investment expense: Only qualifying interest, limited to 20% of dividend income, is permitted for ordinary resident dividend income.
- Ignoring residential status: Non-resident withholding and treaty analysis differ from resident section 194 treatment.
- Using the wrong law for a 2026 payment: Apply the transition by payment or credit date, with the 2025 Act applying from 1 April 2026.
- Filing with unreconciled AIS data: Request a correction from the deductor before claiming a TDS amount that is not reflected in the tax records.
Practical checklist before submitting your return
- List every company and fund that paid or credited a dividend during the relevant financial year.
- Record the gross amount, payment or credit date, TDS deducted and net bank receipt.
- Separate ordinary share dividends from REIT/InVIT, AIF, GDR, IFSC and other special-category distributions.
- Confirm your residential status and whether a DTAA claim is relevant.
- Match Form 16A, AIS and Form 26AS; retain evidence of any correction request.
- Check that any interest deduction stays within the 20% ceiling and that no other expenses have been deducted.
- Use the law applicable to the payment or credit date, especially for transactions around 31 March and 1 April 2026.
Frequently Asked Questions
If no TDS was deducted because my dividend was ₹5,000 or less, do I still disclose it?
Yes. The ₹5,000 condition is only a section 194 withholding exception for an individual’s non-cash dividend from one company. The dividend remains taxable and should be reported in the applicable income-from-other-sources schedule.
Can I claim dividend TDS if it is missing from Form 26AS?
Claim only the amount reflected and supported by the tax records. Ask the company or other deductor to correct its reporting, then reconcile the updated AIS or Form 26AS before relying on the credit.
Does the 10% dividend TDS rate apply to non-residents?
No. The AY 2026-27 TDS table lists 20% under section 195 for ordinary dividends paid to non-residents, while a valid DTAA can change the applicable result. Special categories can have different rates.
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