Dividend income and tax rules: Here's what investors must know to save some extra bucks

New Delhi:

For many investors, dividends feel like a reward for smart financial behaviour. You pick strong companies, hold them in your portfolio, and receive regular payouts — simple, right? But when it comes to taxation on dividend income in India, the simplicity often ends. According to CA Ruchika Bhagat, MD, Neeraj Bhagat & Co., several investors fail to understand how dividends are taxed, what deductions are allowed, and how to report them correctly while filing returns.

Ignoring these aspects can lead to unnecessary tax payments or scrutiny from the tax authorities. Here we break down the key rules and common loopholes investors tend to overlook.

1. Dividend Income Is Fully Taxable — At Slab Rates

Before FY 2020–21, dividends were tax-free in the hands of investors because companies were already paying Dividend Distribution Tax (DDT). However, the old regime has changed. Today:

• Dividend income is taxable in the hands of the investors

• It is added to the total income and taxed according to your income tax slab

"This means high-income investors may pay as much as 30 per cent + applicable surcharge and cess on dividend earnings. Many investors still assume dividends are tax-free - a costly misunderstanding," Bhagat said.

2. TDS Applies To Dividend Income

If you receive more than Rs 5,000 in dividends from a company or mutual fund in a financial year:

• 10 per cent TDS is deducted by the payer (company or AMC)

• If PAN isn’t provided, TDS increases to 20 per cent

Here’s what most investors miss:

If you fall under a lower tax slab, you must claim a refund for excess TDS deducted.

"And if no TDS shows up in Form 26AS or AIS? You still need to report dividend income — because it is taxable regardless of TDS," she said.

3. Dividend Advance Tax Liability

Investors with significant dividend income may need to pay advance tax if their tax liability exceeds Rs 10,000 in a year.

Tax law expects you to estimate dividend income — but since companies don’t announce dividends in advance, this becomes tricky.

The rule offers relief:

Advance tax payment is only triggered after the dividend is declared.

However, failing to pay in time can attract interest under Sections 234B & 234C.

4. Deductions Allowed But With A Cap

Under Section 57, investors can claim deductions on interest expense incurred to earn dividend income (like a loan taken to invest). But only up to 20 per cent of the dividend income earned.

Let's understand this with an example:

Dividend income - Rs 50,000
Interest paid - Rs 15,000
Deduction allowed - Rs 10,000 (20 per cent of Rs 50,000)

Other expenses like advisory charges or demat maintenance are not deductible.

5. Dividend from Foreign Companies

Dividends received from foreign shares or ESOPs are:

• Fully taxable at slab rate

• Also subject to foreign tax, which may be eligible for Foreign Tax Credit under DTAA

Many fail to claim the credit, resulting in double taxation.

6. Reporting of Dividend Income in ITR

Investor often don’t report income if:

• TDS is not deducted, or

• Dividend is reinvested (like in some mutual funds)

However, experts are of the view that every dividend must be reported under ‘Income from Other Sources’. Not reporting can trigger mismatch notices, especially with AIS now tracking every payout.

"Dividends are a great passive income source — but optimising the tax implications is equally essential," Bhagat concluded.

To recap the top misses by investors:

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