Tax Guide

Dividend income: why it's not as passive as it seems.

"I received ₹80,000 dividend from my stock portfolio. Is it tax-free?"

Dividends have been taxed since April 1, 2020, in India. Dividends received from Indian companies were earlier exempt in the hands of investors (Dividend Distribution Tax was paid by the company). For FY 2020-21 onwards, dividends received by investors will be fully taxed as per their slab rates.

Your ₹80,000 dividend is income. If your slab rate is 30%, the dividend income will attract ₹24,960 tax. If your dividend income exceeds ₹5,000 per company per year, the company pays 10% TDS on dividends. It shows up in 26AS. If you do not declare dividends in your ITR, your income will attract scrutiny from the Income Tax Department.

Buyback Income – An important exemption to note is that Section 10(34A) provides an exemption for buy-back income under certain conditions. Foreign dividend income is also taxable at slab rates.

What the law says — exact provisions

Section 2(22)(a)

Dividend includes any distribution by company from accumulated profits. Fully taxable in recipient's hands from AY 2021-22.

Section 194

TDS @ 10% on dividend above ₹5,000 per company per year. Deducted at source by the company.

Section 57

Interest on loan taken to invest in shares/MF: deductible against dividend income — up to 20% of dividend.

Section 90/91

Foreign tax credit on dividend from foreign companies if Double Taxation Avoidance Agreement applies.

CA Rishabh's verdict

Bottom line

All dividends are taxable at your slab rate. TDS of 10% is deducted by the company. Declare in ITR under "Income from Other Sources." Loan interest for investments is partially deductible against dividends.