Tax on Dividend Income - Exemptions & Reliefs

When companies make a profit, they may share a portion of it with their shareholders in the form of dividends. Dividends can be given in cash or as cash equivalents. Not all companies pay dividends, and some may choose to reinvest their earnings into the business instead. If you do receive dividends, they count as income for you, which means they come with tax implications. So, how are dividends taxed in India? Let’s find out.

Taxation on dividend income in India 

Dividends received from stocks and mutual funds are taxable in the hands of the investor. These dividends are added to your total income for the year and taxed according to your applicable income tax slab rate.

Additionally, under Section 194 and Section 194K of the Income Tax Act, 1961, any company or mutual fund that pays dividends to a resident Indian shareholder must deduct 10% Tax Deducted at Source (TDS) if the payout exceeds the threshold in a financial year. If you do not provide your Permanent Account Number (PAN), TDS will be deducted at a higher rate of 20%. In either case, you do not receive the full dividend amount directly. Instead, the company first deducts tax on dividend income. 

For example, if a company declares a ₹100 dividend, it will first deduct ₹10 (10%) as TDS. You will receive ₹90, while the deducted ₹10 is deposited with the tax department on your behalf. 

You can claim a refund for this TDS when you file your Income Tax Return (ITR) if your total tax liability for the year is lower than what you have paid.

Exemptions on dividend income

Dividend income up to ₹10,000 is exempt from TDS. If the dividend you receive from a single stock or mutual fund does not exceed ₹10,000 in a financial year, no TDS will be deducted. However, if the dividend from any one stock or mutual fund crosses this threshold, a 10% TDS will apply.

Previously, the TDS exemption limit was ₹5,000, but as per the amendments in the Union Budget 2025, this has now been raised to ₹10,000. It is important to note that this exemption applies on a per-stock or per-mutual fund basis rather than on the total dividend income earned across all investments. This change will take effect from April 1, 2025.

Reliefs available for dividend income

High dividend earners benefit from a capped surcharge rate. Normally, a surcharge is levied on individuals with very high incomes, which increases their overall tax burden. However, for dividend income, the surcharge will not exceed 15%, even if the total income crosses ₹2 crore or ₹5 crore. This provides significant relief compared to the usual surcharge rates of 25% or 37% that apply to higher income brackets.

It is important to note that this capped surcharge does not apply to dividend income taxed under Sections 115A, 115AB, 115AC, 115ACA, or 115E. In such cases, the standard surcharge rates may still be applicable.

Removal of Dividend Distribution Tax (DDT) on dividend income and its impact on investors

Until the financial year 2019-20, dividend income received from an Indian company was exempt from tax for shareholders. This was because the company distributing the dividend had already paid DDT to the government before making the payment.

However, the Finance Act, 2020 changed the way dividends are taxed in India. From April 1, 2020, all dividends received are taxable in the hands of the investor/shareholder. Now, you bear the responsibility of paying tax on dividend income. 

Earlier, DDT was taxed at 20.56%, which significantly affected the net dividend you received. With its elimination, you now pay taxes based on your annual income. If you fall under a lower tax slab, you may end up saving more. This change also makes the system fairer across different income groups.

Double taxation relief for dividends

If you receive dividends from a foreign company, you may be subject to tax in both India and the company's home country. However, there are ways to avoid this double taxation.

If India has a Double Taxation Avoidance Agreement (DTAA) with the foreign country, you can claim a tax credit for the tax you have already paid abroad and adjust it against your tax liability in India. Even if there is no DTAA, you can still get relief under Section 91 of the Income Tax Act, 1961. This way, you will not have to pay tax on the same income twice. 

Depending on your situation, you can claim relief under either the DTAA provisions or Section 91, whichever benefits you more.

Tax on foreign dividends

As per the Central Board of Direct Taxes (CBDT) definition, if you are a resident Indian, you are required to pay taxes on your dividend income, whether earned in India or abroad. Foreign dividends are added to your total income and taxed at the applicable tax rate based on your income slab. Your earnings will be first converted into Indian rupees and then taxed accordingly. 

However, if you are a Non-Resident Indian (NRI), only dividends from Indian companies are taxable in India at a rate of 20% (plus applicable surcharge and cess), while dividends from foreign companies are not taxed in India.

Recent changes in dividend taxation in 2025

As highlighted above, the Union Budget 2025 has increased the TDS limit on dividends earned from stocks and mutual funds from ₹5,000 to ₹10,000, applicable from April 1, 2025. 

How to report dividend income in tax returns? 

When filing your ITR, you can report any dividend income earned during the year under the ‘Income from Other Sources’ section. Make sure to include all dividends received from stocks and mutual funds to avoid any discrepancies in your tax filing.

Conclusion 

Understanding dividends and their tax treatment is essential to ensure compliance with tax laws. Knowing how dividends are taxed helps you plan better and claim refunds when applicable. It also gives you a clearer picture of how taxes impact your overall profits and what you actually take home after deductions.