Dividend Tax
Dividend Tax refers to the income tax payable by shareholders on dividend income received from Indian companies, re-classified as taxable income in the hands of recipients following the abolition of the Dividend Distribution Tax (DDT) by Budget 2020.
Prior to April 1, 2020, dividends from Indian companies were taxed through the Dividend Distribution Tax (DDT) paid by the distributing company — shareholders received dividends net of DDT and the income was largely exempt in their hands (with a minor surcharge for dividends exceeding ₹10 lakh per year). Budget 2020 fundamentally reversed this by abolishing DDT and shifting the tax incidence entirely to shareholders, who now pay tax on dividend income at their applicable income tax slab rate.
This shift significantly increased the tax cost of dividends for high-income investors. Under DDT, the effective tax on dividends was approximately 20.56% (including surcharge and cess) at the company level, and shareholders in lower income brackets faced the same effective rate regardless of their personal slab. Under the current regime, a taxpayer in the 30% slab pays 30% tax plus surcharge and cess on all dividend income — potentially above 35% effective rate — while a taxpayer in the 5% slab pays only 5.2%.
TDS is now deducted at source on dividends: companies deduct 10% TDS under Section 194 on dividends exceeding ₹5,000 in a financial year paid to resident shareholders. This TDS is credited to the shareholder's Form 26AS and is adjustable against their final tax liability. For shareholders in brackets above 10%, additional tax is payable at the time of ITR filing; for those in lower brackets, a refund is due.
Dividend income must be declared in the ITR under 'Income from Other Sources' (Schedule OS) and taxed at slab rates. Investors receiving dividends from multiple companies and mutual funds (post the change to IDCW — Income Distribution cum Capital Withdrawal — plans) must aggregate all dividend receipts for the year. A common oversight is forgetting to include dividend credits from mutual funds' IDCW plans, which are also reported in AIS.
For NRI investors, dividend TDS under Section 195 is typically 20% plus applicable surcharge and cess, unless a reduced rate applies under a DTAA. The US-India DTAA, for example, may allow a reduced withholding rate subject to treaty conditions and the investor obtaining a tax residency certificate (TRC) from their country of residence. Ensuring the correct TDS rate is applied requires proactive coordination between the NRI and the Indian company or its registrar.