Dividend tax in India: who pays what after Budget 2020

The big shift: DDT abolished in Budget 2020

Before 1 April 2020, dividends from domestic companies were effectively tax-free in the hands of shareholders. The company paid a Dividend Distribution Tax (DDT)before distributing the dividend — at an effective rate of roughly 20.56% (base rate of 15% plus surcharge and cess). From the investor's perspective, whatever they received was clean income not subject to further tax (except for a 10% tax on individuals and HUFs receiving more than ₹10 lakh in dividends annually under Section 115BBDA, which has since been removed).

The Union Budget 2020-21, presented on 1 February 2020, abolished DDT entirely from FY 2020-21 onward. The shift moved the tax obligation from the company to the shareholder. Dividends are now included in the recipient's total income and taxed at their applicable income tax slab rate, just like salary or interest income. For investors in lower tax brackets this was a clear benefit; for those in the 30% slab, dividends became significantly more expensive post-tax.

You can see how dividend yield interacts with your post-tax returns using the dividend yield calculator.

How dividends are taxed at slab rates

For resident individuals, Hindu Undivided Families (HUFs), and companies receiving dividends from domestic companies, the dividend income is added to total income under the head Income from Other Sources and taxed at the applicable slab rate for the financial year.

Under the new tax regime (default from FY 2024-25), the slab rates applicable to dividend income are:

• Up to ₹3 lakh: Nil
• ₹3 lakh to ₹7 lakh: 5%
• ₹7 lakh to ₹10 lakh: 10%
• ₹10 lakh to ₹12 lakh: 15%
• ₹12 lakh to ₹15 lakh: 20%
• Above ₹15 lakh: 30%

Under the old tax regime (which taxpayers could opt into until FY 2024-25), the slabs differed and deductions like Section 80C were available. Dividend income itself had no special deduction available under either regime — no standard deduction, no Section 80C shelter, no indexed cost benefit. The full amount received is taxable.

One permitted deduction: interest expense incurred to earn the dividend income is deductible under Section 57, but only up to 20% of the dividend income. Borrowing to invest in dividend- paying shares and deducting the interest is a legitimate planning structure, but the 20% cap limits the benefit significantly.

TDS at 10%: Section 194 explained

When a domestic company pays a dividend to a resident individual, it is required under Section 194 of the Income Tax Act to deduct tax at source (TDS) at 10% before making the payment — but only when the total dividend paid to that investor during the financial year exceeds ₹5,000.

Important nuances:

• The ₹5,000 threshold is per company per financial year. Dividends from different companies are tracked separately for TDS purposes.
• If you hold shares jointly, TDS is applied in the name of the first holder.
• TDS is deducted on the gross dividend amount before any netting of losses or expenses.
• The TDS amount appears in your Form 26AS and is creditable against your final tax liability when you file the ITR. If your effective rate on dividend income is lower than 10% (e.g., because your total income is within the lower slabs), you can claim a refund of the excess TDS.
• If you have not linked your PAN with the company's records or your PAN is invalid, TDS is deducted at 20% under Section 206AA.

For domestic companies receiving dividends from other domestic companies, TDS is under Section 194 as well, but the Section 80M deduction (discussed below) changes the effective economic outcome significantly.

Form 15G and 15H: how to get nil TDS

Resident investors whose total income for the year is below the basic exemption limit can submit a self-declaration form to the company (or to NSDL/CDSL if shares are held in demat form through a depository participant) to receive dividends without TDS deduction.

• Form 15G: for individuals below 60 years and HUFs. Two conditions must both be satisfied: (a) the tax on total income is nil, and (b) total interest (and dividend) income does not exceed the basic exemption limit.
• Form 15H: for senior citizens (60 years and above). The condition is only that the tax on total income for the year is nil — the second condition about total income not exceeding exemption limit does not apply.

Forms must be submitted at the beginning of each financial year and are valid only for that year. For demat account holders, CDSL and NSDL have online portals where Form 15G/H can be submitted centrally once, covering all companies whose shares you hold — eliminating the need to submit to each company separately. This facility has become the standard approach since FY 2022-23.

Submitting a false 15G/H — claiming nil-tax status when your actual income is taxable — carries penalties under Section 277 of the Income Tax Act. Do not submit these forms unless you genuinely qualify.

Section 80M: relief for companies receiving dividends

The abolition of DDT created a potential cascading problem for holding companies and promoter entities receiving dividends from subsidiaries: the subsidiary would pay corporate tax, distribute the remaining profit as dividend, and the holding company would then pay corporate tax again on the same income.

Section 80M, reintroduced by the Finance Act 2020 (effective FY 2020-21), addresses this. A domestic company receiving dividends from another domestic company (or a foreign company or a business trust) is allowed a deduction equal to the dividend received, to the extent the company distributes the same dividend to its own shareholders. The deduction is available in the year the dividend is distributed onward to shareholders, up to the amount received.

In practical terms: if Company A receives ₹100 in dividends from Company B and distributes ₹80 to its own shareholders, Section 80M allows a deduction of ₹80 — so only ₹20 faces double taxation. This is a significant relief for multi-layered holding structures, but the timing and quantum of the deduction require careful planning.

Deemed dividend under Section 2(22)(e)

Section 2(22)(e) of the Income Tax Act treats certain transactions between closely-held companies and their major shareholders as "deemed dividends" — even though no formal dividend was declared. The provision applies when a company (in which the public are not substantially interested) makes a loan or advance to:

• A shareholder holding more than 10% of voting power (beneficial interest), or
• A concern in which such a shareholder has a substantial interest (more than 20%).

The loan or advance is treated as a dividend to the extent of the accumulated profits of the company. It is taxed at the slab rate of the shareholder or concern receiving it. Unlike regular dividends, there is no TDS under Section 194 on deemed dividends — they are assessed during the scrutiny of the return.

This provision is highly litigated and often catches promoters and family business owners off guard. If your closely-held company has provided loans to you personally or to an entity in which you have a substantial stake, these may be treated as deemed dividends. The courts have taken varying positions on whether genuine commercial loans qualify for exemption. This is an area where consultation with a chartered accountant is strongly suggested.

Mutual fund dividends: the IDCW option

In June 2021, SEBI mandated that mutual fund "dividend" plans be renamed to IDCW (Income Distribution cum Capital Withdrawal)plans, to better reflect that payouts may include return of capital, not just income. The tax treatment, however, predates the name change and is governed by existing income tax rules.

IDCW payouts from mutual funds are treated as follows:

• For equity-oriented funds: IDCW is taxable as income from other sources at the investor's slab rate. The fund house deducts TDS at 10% when the aggregate payout to a resident investor exceeds ₹5,000 in a financial year.
• For debt-oriented funds: IDCW is also taxable at slab rates. TDS is deducted at 25% for resident individuals on aggregate payouts above ₹5,000.

An important subtlety: when a fund pays IDCW, the Net Asset Value (NAV) of the fund falls by the payout amount. From an economic standpoint, IDCW is partly or wholly a return of your own capital — not a true income. Investors in the 30% tax bracket who chose IDCW over the Growth option have historically paid more tax on the same underlying return, making the Growth option with capital gains treatment generally more efficient for high-tax-bracket investors.

NRI dividend taxation: 20% at source

Non-Resident Indians (NRIs) and other non-residents receive less favourable treatment. Under Section 115A, dividends received by a non-resident from a domestic company are taxed at a flat 20% (plus surcharge and cess) on the gross amount, regardless of the slab rate that would otherwise apply.

TDS under Section 195 is deducted at 20% (plus applicable surcharge and cess) on the full dividend amount for NRIs — there is no ₹5,000 threshold as exists for residents. This means even a ₹100 dividend paid to an NRI has TDS deducted at source.

However, Double Taxation Avoidance Agreements (DTAAs) between India and many countries provide a lower withholding tax rate on dividends. For example:

• India-USA DTAA: 15% or 25% depending on shareholding percentage
• India-UK DTAA: 10% or 15%
• India-Singapore DTAA: 10% or 15%
• India-UAE DTAA: 10%

To claim DTAA benefits, NRIs must submit a Tax Residency Certificate (TRC) from their country of residence and Form 10F to the company or the depository. Without this, TDS is deducted at the statutory 20% rate. The DTAA rate is applied at source once the required documents are submitted.

NRIs who receive dividends through a Non-Resident Ordinary (NRO) account are taxed at the same 20% rate. Dividends repatriated from an NRO account are subject to limits, unlike dividends received through an NRE account (which are fully repatriable).

ITR filing: where to report dividends

Dividend income is reported under Schedule OS (Other Sources) in both ITR-2 and ITR-3. The breakdown is:

• Dividend from domestic companies: enter in the "Dividends" row under Schedule OS. If you had dividends from multiple companies, the aggregate amount goes here.
• IDCW from mutual funds: also reported in Schedule OS as dividend income.
• TDS credit: confirm that TDS deducted by companies appears in your Form 26AS and AIS. The ITR utility auto-populates TDS credits from Form 26AS — verify against your actual records before submitting.

A common mistake is treating dividends as not requiring reporting if TDS has been deducted — the TDS is only a prepayment of tax, not a final settlement. If your marginal rate is 30% and TDS was 10%, you owe the difference. If your marginal rate is 5% and TDS was 10%, you are entitled to a refund. Both outcomes require reporting the dividend income in the return.

Dividend income from foreign shares is also taxable in India for resident taxpayers. It is reported under Schedule OS and converted to INR at the SBI telegraphic transfer buying rate for the relevant date. Foreign tax paid (if any) can be claimed as a credit under Schedule FSI (Foreign Source Income) and Schedule TR (Tax Relief).

Where to go next

To understand how dividends affect your total equity return, use the dividend yield calculator. For a full walkthrough of ITR-2 and how to combine dividend income with capital gains in a single return, see the ITR capital gains guide. If you also have capital gains from equity to report alongside dividends, the LTCG guide and STCG guide cover both scenarios.

This article is educational only and does not constitute tax or investment advice. Tax laws change; please verify with a chartered accountant or refer to the latest CBDT circulars before filing your return. EquitiesIndia.com is not liable for any reliance placed on this article.