Tax on Dividend Income

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Jayni Bhavsar

Dividend Income
Income from Other Sources
Income Tax
Last updated on February 14th, 2024

Dividends are a form of payment that companies distribute to their shareholders as a way of sharing their profits. Essentially, dividends are like bonuses for investors who have put their money into the company. By distributing these payouts, companies aim to reward their shareholders for their investment and loyalty. Dividends can be an important source of regular income for shareholders, and they are often viewed as a sign of financial strength and stability for the company.

What is Dividend Income?

A dividend means the distribution of profits by a company to its shareholders. It is different from interest. While interest is paid regularly, the dividends are paid only when the Company decides to pay. It is usually paid when a Company is earning profits.

Companies typically distribute dividends regularly, often on a quarterly or annual basis. Investors receive this income separately from any capital gains resulting from changes in the stock’s price, considering it one of the primary benefits of investing in dividend-paying stocks.

The dividend income can be received from the following sources:

Tax on Dividend Income

Dividend income received by taxpayers is subject to taxation according to their applicable income tax slab rates. Additionally, taxpayers are required to report this income in their Income Tax Returns (ITR) under the category “Income from Other Sources.” The tax treatment remains consistent whether the dividends are received from domestic or foreign companies.

TDS Applicability

The companies i.e payer need to deduct TDS under section 194 in the case of securities and, under section 194K in the case of mutual funds as per the below-mentioned rates:

AssesseeTDS Rates
Resident10%
Non-Resident20%

For NRIs, the 20% TDS rate is subject to DTAA. To benefit from reduced tax deductions, non-residents should provide supporting documents like Form 10F or proof of beneficial ownership and tax residency. Failure to do so may lead to higher TDS deductions, which can be reclaimed during ITR filing.

Taxability of dividend

Deduction of Eligible Expenses

If the taxpayer has borrowed funds for investing in the stock market, they can claim the interest paid as an expense against dividend income. However, the deduction for interest expense is limited to 20% of the total dividend income. Additionally, no other expenses, such as commissions or salaries, can be claimed.

For example, Mr. Raj borrowed money to invest in the share market and paid an interest of INR 2,000. And in the same year, he earned a dividend of INR 7,000. Here, he can claim the interest amount maximum of up to 20% of the dividend i.e. INR 1,400 (7,000 * 0.2). Hence, the taxable dividend will be INR 5,600 (7,000 – 1,400).

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FAQs

Is TDS deductible on dividend payments to a non-resident shareholder?

Yes, the companies have to deduct TDS at the rate of 20% in cases where the receiver is NRI.

Is TDS required to be deducted under Sec 194K on the sale of mutual funds?

Yes, the payer should deduct TDS under section 194K at a rate of 10% on Dividend Income.

What is the prescribed limit of dividend for deduction of TDS?

The prescribed limit to deduct TDS on dividend income is INR 5000.

When the dividend income will be taxable?

Dividend income is taxable on the year of declaration, distribution, or payment by the company whichever is earlier.

Got Questions? Ask Away!

  1. Hi

    I am an F&O Trader and also derive income from interest on deposits, rent and dividends. I understand that F&O trading income is reported as business income and the rest are reported as income from other sources. Since all these attract tax at the individuals’ slab rates, can I aggregate these and claim expenses incurred in F&O trading, and pay tax on the net, even if the trading activity resulted in a loss?

  2. Hi @gdshan

    FnO is a non-speculative business income, taxed under Income from Business & Profession, interest on deposits & dividends are taxed under IFOS and rental income is taxed under Income from House Property.

    Yes, true, all the incomes are taxed at the slab rates, but set off and carry forward of loss under different income heads have different rules.
    You can set off your FnO losses in the current year against all incomes except salary and pay tax on the income after setting off. In future years, it can be set off against business income (both speculative and non-speculative). The loss can be carried forward for 8 years.

    Hope this helps.

  3. Hi @msachin

    Any dividend income earned during the financial year should be reported, irrespective TDS has been deducted or not. Dividend income is reported under the “IFOS” head and taxed at the applicable slab rate.

  4. Hi @Shrutika_Shah

    Is the above applicable only if loss on F&O business still exists for that year after setting off against all incomes except salary?

  5. Hi @gdshan

    Yes, FnO losses in the current year can be set off against all incomes except salary. If still, any losses remain, it can be carried forward for 8 years after set off.

  6. Hi @Ajith_Kumar

    The limit of ₹5,000 is for TDS to be deducted.
    In your case, if the annual dividend income is ₹5,500, you will have to declare the entire amount of the dividend in your ITR under “Income from Other Sources.”

  7. Hello, Where to show the income received from REITs in ITR 2 and how to claim exemption in the return? Is income distribution from Mindspace and Embassy fully exempt from tax?

  8. even i have the same problem…let me know if you get the answer

  9. Hi @Shweta_Agrawal

    Income received from Real Estate Investment Trusts (REITs) needs to be reported as dividend income. It should be reported under the head “Income from Other Sources” (IFOS) in ITR.

    And the income distribution from REITs, such as Mindspace and Embassy, is not exempted from tax.

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