Understanding Tax on Dividend Income from Shares and Mutual Funds

If you're earning income through dividends from shares or mutual funds, it's important to understand how the tax on dividend income works in India. Many people overlook this aspect, but knowing the tax implications can help you manage your finances better.

In this blog, we’ll simplify everything you need to know about tax on dividend income. We’ll explain what dividend income is, and its sources, and then cover the current tax provisions and rates. 

You’ll also learn about the taxation of dividends from foreign companies, advance tax requirements, and how to claim deductions or exemptions. Whether you're experienced or new to dividend income, this guide will give you a clear understanding of the tax on dividend income and help you stay on top of your financial responsibilities.

Keep reading!

What Exactly is Dividend Income?

Dividend income refers to the payments companies make to their shareholders from the profits they generate. When you own shares of a company, you may receive a portion of its earnings in the form of dividends. These payments are typically made on a per-share basis, meaning the more shares you own, the higher your dividend income. 

In addition to shares, mutual funds may also pay out dividends to their investors, which are derived from the earnings of the underlying securities in the fund. Dividend income is considered a steady source of passive income and plays a key role in your overall income tax calculations.

Now that you know what dividend income is, let's explore the key sources where it usually comes from.

Common Sources of Dividend Income

Understanding the various sources of dividend income helps you track where your earnings come from. Here are the main sources you should be aware of:

1. Domestic Companies

Dividends from domestic companies are one of the most common sources. When you hold shares in Indian companies, they may distribute a portion of their profits to shareholders as dividends. These dividends are usually paid on a regular basis, such as quarterly or annually.

2. Foreign Companies

If you receive dividends from shares of foreign companies, these are paid in the currency of the respective company. The amount may vary based on the company’s performance and policies.

3. Equity Mutual Funds

Equity mutual funds often provide dividends to investors who opt for the dividend payout option. These funds primarily invest in stocks, and when they earn profits, they may distribute a portion of those profits as dividends to their investors.

4. Debt Mutual Funds

Similar to equity mutual funds, debt mutual funds can also pay out dividends if you choose the dividend payout option. These funds invest in fixed-income securities and distribute earnings to investors as dividends.

Once you're clear on the sources, let’s move forward and see what the current tax provisions mean for your dividend income.

Current Tax Provisions on Dividend Income

It’s important to look at the current tax provisions on dividend income to manage your finances properly. Here is how dividends are taxed in India:

• Abolition of Dividend Distribution Tax (DDT)

Previously, companies were required to pay a Dividend Distribution Tax (DDT) at a rate of 15% on the gross amount of dividends before distributing them to shareholders.

However, the Finance Act 2020 abolished DDT, and now the tax burden has shifted from companies to individual investors. You are now responsible for paying tax on the dividends you receive based on your income tax slab rate.

Now that we’ve set the stage with the tax provisions, let’s get into the specifics of how tax rates apply and which deductions are available to you.

Tax Rate and Deductions for Dividend Income

When it comes to dividend income, understanding the tax rates and available deductions is important. Here is what you should be aware of:

1. Tax Rates on Dividend Income

Since the abolition of the DDT in the financial year 2020-21, dividends have been taxed in the hands of investors. The tax you pay depends on your income tax slab under the new tax regime for FY 2024-25.

The income tax slabs are as follows:

• Income up to ₹3,00,000: Nil tax

• Income between ₹3,00,001 and ₹7,00,000: Taxed at  5%

• Income between ₹7,00,001 and ₹10,00,000: Taxed at 10%

• Income between ₹10,00,001 and ₹12,00,000: Taxed at  15%

• Income between ₹12,00,001 and ₹15,00,000: Taxed at 20%

• Income above ₹15,00,001: Taxed at 30%

Remember, the amount of income exempt from tax for senior citizens depends on the tax regime they choose. Under the old tax regime, a senior citizen can have up to ₹3 lakh of income exempt from tax, while a super senior citizen can have up to ₹5 lakh exempt. However, if they select the new concessional tax regime, the exemption limit remains ₹3 lakh, regardless of age.

2. Tax Deducted at Source (TDS)

If your total dividend income exceeds ₹5,000 in a financial year, companies will deduct TDS at a rate of 10% before you receive your dividends. 

This means that if you earn more than this threshold, 10% will be deducted from your dividend payments as TDS.

3. Surcharge and Cess

While dividends are taxed according to your slab rate, additional charges may apply:

• A surcharge may apply if your total income exceeds ₹50 lakh, with rates varying based on income levels.

• An additional Health and Education Cess of 4% is levied on the total tax amount.

With the tax rate and deduction details in mind, it’s important to also understand the taxation of dividends received from foreign companies.

Taxation of Dividends from Foreign Companies

When you receive dividends from foreign companies, it’s crucial to understand how they are taxed in India, as the tax treatment can vary depending on several factors. Here’s how foreign dividends are taxed and what you need to know:

1. Tax Treatment

Dividends from foreign companies are categorized as “income from other sources” under Indian tax laws. This means that the dividends you receive will be added to your total income and taxed according to your income tax slab rate. 

2. Tax Deducted at Source (TDS) for Foreign Companies

If your total dividend income from foreign companies exceeds ₹5,000 in a financial year, TDS will be deducted at a rate of 10%. It's important to note that if you do not provide your Permanent Account Number (PAN), the TDS rate will increase to 20%.

3. Double Taxation Relief

If dividends are taxed both in the country where the foreign company is based and in India, you may experience double taxation. 

To address this, India has agreements called Double Taxation Avoidance Agreements (DTAAs) with several countries. These agreements often allow reduced tax rates on dividends, typically ranging from 5% to 15%, depending on the specific treaty provisions.

4. Special Cases for Domestic Companies Receiving Foreign Dividends

If a domestic company receives dividends from a foreign company in which it holds 26% or more equity, the dividend is taxed at a concessional rate of 15%, plus any applicable surcharge and cess under Section 115BBD. If the shareholding is less than 26%, the dividends are taxed at the normal corporate tax rate, with allowances for related expenses.

After looking into the tax on dividends from foreign sources, let’s explore what you need to know about advance tax on your dividend income.

Advance Tax on Dividend Income

Advance tax is a system where you pay your tax liabilities in installments throughout the financial year instead of making a lump sum payment at the time of filing your income tax return. Understanding the rules surrounding advance tax payments is crucial, especially for the financial year 2025. Here’s what you need to know:

1. Applicability of Advance Tax

Advance tax is a system where you pay your tax liabilities in installments throughout the financial year instead of making a lump sum payment at the time of filing your income tax return. 

You must pay advance tax on your dividend income if your total tax liability for the year is expected to be ₹10,000 or more, which includes all sources of income, not just dividends.

2. Calculation of Advance Tax

To calculate your advance tax:

• Estimate Total Income: Add up your expected income from all sources, including dividend income.

• Apply Deductions: Subtract any eligible deductions you can claim, such as those under sections 80C or 80D.

• Compute Tax: Calculate your total tax liability using the applicable income tax slab rates.

3. Payment Schedule

For the financial year 2024-2025, advance tax payments are due in four installments:

• 15% by June 15

• 45% by September 15

• 75% by December 15

• 100% by March 15

4. Penalties for Non-Payment or Short Payment

If you fail to pay your advance tax or if the amount paid is less than your actual tax liability, you may face interest and penalties. The interest is charged under Section 234A and Section 234B of the Income Tax Act.

5. TDS and Advance Tax Interaction

If TDS has been deducted from your dividend income, you can claim this amount as a credit when you file your return. This means that the TDS you’ve already paid will reduce the amount of advance tax you need to pay.

With advance tax covered, let's now take a look at the steps involved in claiming deductions and exemptions for your dividend income.

Process for Claiming Deductions and Exemptions on Dividend Income

When it comes to claiming deductions and exemptions on your dividend income, it’s important to follow the correct process. Here is what you can do:

1. Identify Eligible Deductions

You can claim a deduction for interest expenses incurred on money borrowed to explore shares or mutual funds. However, this deduction is limited to 20% of your total dividend income. Other expenses, such as commissions or salaries related to earning dividends, are not eligible for deductions.

2. Collect Necessary Documents

To claim deductions, make sure you gather all the required documents, including:

• Interest payment statements from your lender.

• Dividend statements from companies or mutual funds.

• Any other relevant documentation that supports your claim.

3. Submit Form 15G or 15H

If your estimated total income is below the taxable limit, you can submit the following forms:

• Form 15G: For individuals whose total tax liability is nil

• Form 15H: For senior citizens with no tax liability

These forms will allow you to receive dividends without TDS deductions, as long as your income remains below the exemption threshold.

4. Report Dividend Income in Your Tax Return

When filing your Income Tax Return (ITR), ensure that you report all dividend income under the “Income from Other Sources” section. Include both domestic and foreign dividends in your total income.

5. Claim Deductions in Your ITR

While filing your ITR, make sure to:

• Enter the total amount of interest expense that is eligible for deduction/

• Adjust your taxable income to reflect these deductions.

6. Review Double Taxation Relief (if applicable)

If you receive dividends from foreign companies and have paid tax on them in the foreign country, check if you can claim double taxation relief under the DTAA between India and the foreign country. This can help reduce your overall tax liability.

7. Keep Track of TDS Deducted

If TDS has been deducted from your dividends, ensure that the amount is correctly reflected in your Form 26AS. You can then claim this TDS as a credit against your total tax liability when filing your return.

Conclusion

We’ve covered the key aspects of tax on dividend income from shares and mutual funds, including how dividend income is taxed, the relevant provisions, and the process for claiming deductions and exemptions. 

Understanding the shifting tax liabilities on dividend income is crucial for ensuring that you manage your finances effectively and comply with the latest tax regulations. You can make more effective decisions regarding your dividend income by staying informed about tax rates and advance tax requirements. 

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Disclaimer

The content provided in this blog is intended for general informational purposes only and should not be construed as legal, tax, or financial advice. While the information has been carefully curated, tax laws and regulations can change over time. We advise consulting with a qualified tax professional or financial advisor to understand how the information applies to your personal circumstances.