Indian tax treatment depends on the event, its date, the security and your taxpayer status. A cash dividend is normally reported as Income from Other Sources; a bonus allotment is generally not taxed when received but creates a zero-cost lot; and a domestic-company buyback on or after 1 October 2024 is split into deemed-dividend income plus a separate capital-loss calculation. The steps below show how to classify each transaction, establish cost and holding period, apply the applicable rate and preserve the records needed for your return.
Start by classifying the transaction
Do not combine dividends, buybacks and bonus shares in one spreadsheet column. They use different tax heads, cost rules and dates. This table is the quickest way to identify the calculation you need.
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| Event | Tax treatment | Cost basis | Relevant date or period |
|---|---|---|---|
| Cash dividend | Income from Other Sources in the recipient’s hands | No capital-gains cost calculation | Dividend credited or paid, as shown in company or broker records |
| Bonus shares allotted without payment | Generally not taxed as dividend on allotment | Nil cost under section 55(2)(aa)(iiia) | Holding period starts on the allotment date |
| Sale of original shares after a bonus issue | Capital gain or loss | Original paid cost remains attached to the original lot | Original acquisition date |
| Sale of bonus shares | Capital gain or loss | Nil cost for the bonus lot | Bonus allotment date |
| Domestic-company buyback on or after 1 October 2024 | Amount received is deemed dividend; a separate capital-gains computation uses nil consideration | Actual cost of the shares extinguished is used only in the capital computation | Confirm the transaction date and that the payer is a domestic company |
| Domestic-company buyback before 1 October 2024 | Former section 115QA regime may apply to the company’s distributed buyback income | Do not apply the post-1 October 2024 shareholder calculation retrospectively | Use the date and documents for the historical buyback |
How to calculate tax on ordinary dividends
The Income Tax Department states that “dividend income is taxable in the hands of the recipient under the head ‘Income from Other Sources’.” That rule applies to ordinary dividends received from companies, including dividends credited through a demat or brokerage account. The dividend is not converted into a capital gain merely because you own the shares as an investment.
Step 1: Establish the gross dividend
Use the gross amount in the company’s dividend advice, broker statement or other corporate-action record. If tax was withheld before the money reached your bank account, record the gross dividend as income and keep the withheld amount separately as tax deducted at source (TDS).
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Step 2: Put it in the correct return schedule
- Report the gross amount under Income from Other Sources.
- Apply the rate that is actually applicable to you: this may be your ordinary slab rate or a special rate, depending on the dividend, your residence status and the tax regime available for that year.
- For a non-resident, check whether a tax treaty changes the result and whether the treaty’s documentation and beneficial-ownership conditions are met.
- Claim TDS shown in Form 26AS or the Annual Information Statement as a credit against your final tax liability. TDS is not automatically the final tax on the dividend.
The department’s general pages do not provide one universal dividend tax amount because the result changes with total income, residential status, treaty claims and the applicable assessment year. Reconcile your dividend certificates with Form 26AS/AIS before filing.
Buybacks: the 1 October 2024 dividing line
The tax calculation changes for a domestic-company buyback completed on or after 1 October 2024. First test the date and payer; then perform two separate calculations. Never reduce the deemed-dividend amount by the price you originally paid for the shares.
Buybacks on or after 1 October 2024
- Identify the amount received. Use the amount paid by the domestic company for the shares that were accepted and extinguished.
- Compute deemed-dividend income. The amount received is treated as dividend income. The acquisition cost is not deducted in arriving at this dividend amount, so report the full amount under Income from Other Sources and apply the rate relevant to your status and income.
- Identify the extinguished shares and their cost. Match the accepted quantity to your acquisition lots. If shares came from different purchases, allocate the extinguished quantity using the lot records and the method supported by your broker and return-preparation records.
- Run the separate capital-gains computation. Section 46A deems the consideration for the extinguished shares to be nil. The computation is therefore generally nil consideration minus the cost of those shares, producing a capital loss when the shares had a positive cost.
- Apply ordinary capital-loss rules. Report the loss in the required capital-gains schedule and check the current income-tax-return instructions for eligibility, set-off and carry-forward. A loss is not automatically usable against every type of income.
Illustrative method: If a company pays ₹6,000 for 100 shares and the identified cost of those shares is ₹25,000, the ₹6,000 is considered separately as deemed-dividend income. The capital computation uses nil consideration less ₹25,000, giving a notional ₹25,000 capital loss before applying the normal restrictions. This example shows the separation of the two heads; it does not determine the investor’s final tax.
Buybacks before 1 October 2024
For the earlier regime, section 115QA imposed an additional tax of 20% on domestic-company distributed buyback income in the circumstances covered by that section. That was a company-level buyback-tax framework. Do not import the post-1 October 2024 shareholder deemed-dividend and nil-consideration formula into an older transaction. Use the buyback documents, the transaction date and the return instructions for that year.
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Records needed for a buyback
- Company tender or acceptance statement showing the accepted quantity and amount paid.
- Contract notes and demat statements identifying which shares were extinguished.
- Original purchase invoices or broker reports establishing the cost of each affected lot.
- Form 26AS/AIS and any dividend or tax certificate showing reporting or withholding.
- The relevant year’s return instructions for capital-loss disclosure and carry-forward.
Bonus shares: receipt, cost and later sale
Is the allotment itself taxable?
Bonus shares allotted to equity shareholders without payment are excluded from dividend. Their receipt is therefore generally not taxed as dividend at allotment. A corporate-action statement may show the additional quantity, but it does not create a purchase price or a cash dividend.
Assigning cost under section 55
Section 55(2)(aa)(iiia) gives a bonus share allotted without payment a nil cost of acquisition. Keep the original shares’ actual paid cost unchanged. Do not spread the old cost across the combined post-bonus quantity unless a specific rule for a different corporate action applies; for a standard bonus issue, the original lot keeps its cost and the bonus lot starts at zero.
Determining the holding period
Each lot has its own clock. The original shares are tested from their original acquisition date. A bonus share’s holding period begins on its allotment date. When you sell, classify the original and bonus quantities independently as short-term or long-term; a single sale can contain both classifications.
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Allocating a mixed sale
- List every original purchase lot, its quantity, paid cost per share and acquisition date.
- Add the bonus lot with its allotment date and zero cost.
- Identify the quantity sold from each lot using your broker’s holding report and a consistent lot-allocation method.
- For each lot, calculate sale proceeds less its allocated cost and expenses permitted by the applicable rule.
- Apply the short- or long-term rate to each lot after checking whether the transfer qualifies for section 111A or section 112A.
Worked allocation example
Assume an investor bought 100 shares at ₹100 each, later received 100 bonus shares, and then sold 50 original shares and 50 bonus shares. The original portion carries ₹5,000 of cost (50 × ₹100). The bonus portion carries nil cost. The original 50 shares are tested from the original purchase date; the bonus 50 are tested from the bonus allotment date. Without the sale price, sale date, STT status and the investor’s other qualifying gains, no final tax amount can be calculated. The example demonstrates why quantity, cost and holding period must be tracked by lot.
Rates for qualifying listed-equity sales
For qualifying transfers of listed equity on which the required securities transaction tax (STT) conditions are met, the statutory concessional rates changed for transfers on or after 23 July 2024. Use the rate in force on the sale date, not the date you bought the shares or received a bonus issue.
| Provision | Type of gain | Rate for qualifying transfers on or after 23 July 2024 | Important condition |
|---|---|---|---|
| Section 111A | Short-term capital gain | 20% | Qualifying listed-equity transfer with the required STT treatment |
| Section 112A | Long-term capital gain | 12.5% on the portion above the annual ₹1,25,000 threshold | Threshold applies to aggregate qualifying section 112A gains, not separately to each share or broker account |
The ₹1,25,000 threshold is an annual aggregate for qualifying section 112A long-term gains. Add eligible gains across all relevant listed-equity transactions before determining how much exceeds the threshold. A gain below the threshold does not use up a separate allowance for every security.
When these concessional sections may not fit
- Unlisted shares may use different holding-period and rate rules.
- A transaction without the required STT conditions may not qualify for section 111A or 112A.
- Non-residents must examine residence-specific provisions and treaty claims.
- Shares held as trading stock may be business income rather than capital gains.
- Corporate actions, employee shares and other special instruments can have their own provisions.
When a lot fails the qualifying conditions, use the provision and rate that actually applies to that asset and taxpayer; do not force it into the 20% or 12.5% table.
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- Mark the event. Label each entry as dividend, bonus allotment, share sale or buyback. Keep cash receipts and securities movements separate.
- Confirm dates. Record the dividend date, bonus allotment date, share acquisition dates, sale date and buyback date. The 1 October 2024 buyback split and 23 July 2024 rate change are date-sensitive.
- Confirm the taxpayer and payer. Note whether you are resident or non-resident, whether a treaty is being claimed and whether the buyback payer is a domestic company.
- Build lot-level records. For every purchase, retain quantity, price, charges, acquisition date and broker account. Add every bonus lot at zero cost and its allotment date.
- Calculate the correct tax head. Dividends and post-1 October 2024 buyback receipts go to Income from Other Sources; share sales and the separate buyback computation go to capital gains.
- Check eligibility before selecting a rate. Test STT, listing status, holding period, investor status and whether the shares are investments or trading stock.
- Reconcile information reports. Compare broker statements, corporate-action notices, dividend certificates, Form 26AS and AIS. Investigate mismatches before filing.
- Complete loss reporting. For a buyback capital loss or another share-sale loss, follow the current return schedule and set-off or carry-forward rules. Preserve the computation even if the loss cannot be used immediately.
Common mistakes and how to correct them
Treating a bonus allotment as a cash dividend
A standard bonus allotment without payment is excluded from dividend. Record the quantity and allotment date, then assign nil cost; do not report a fictitious cash receipt.
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Giving bonus shares part of the original cost
The bonus lot has nil cost under section 55(2)(aa)(iiia). Keep the original paid cost with the original lot and use the zero-cost lot when the bonus shares are sold.
Using one holding period for all shares
Original and bonus lots have different start dates. Split the sale and test each lot independently.
Subtracting share cost from post-2024 buyback dividend
The deemed-dividend amount is the amount received from the domestic company. The cost is considered separately in the nil-consideration capital computation.
Applying the new buyback rule to an old transaction
Verify whether the transaction falls before or on/after 1 October 2024. The former section 115QA framework and the post-October-2024 shareholder calculation are not interchangeable.
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Assuming TDS equals final tax
Withholding is a credit. Your final liability still depends on the applicable rate, other income, treaty position, surcharge or cess where relevant, and reported losses.
Using section 111A or 112A without checking conditions
Check listing, STT, holding period, sale date and taxpayer status. If any required condition fails, a different provision may govern.
Ignoring residence and treaty status
Resident and non-resident outcomes can differ, and a treaty claim may require prescribed documentation. Resolve that question before relying on a domestic-rate calculation.
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- Broker contract notes, trade confirmations and demat statements.
- Company dividend certificates and bonus-issue or buyback statements.
- Purchase records showing price, quantity, charges and acquisition date.
- Corporate-action records showing bonus allotment dates and quantities.
- Form 26AS, Annual Information Statement and TDS certificates.
- Your lot-wise worksheets, return acknowledgement and any evidence supporting treaty or non-resident claims.
These records let you explain why a bonus lot has zero cost, why a buyback receipt is split between two tax heads and why a listed-equity rate was or was not available. For a substantial buyback loss, complex lot history or uncertain treaty position, check the current Income Tax Return instructions or obtain advice from a qualified tax professional before filing.
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