How to Manage Taxes on Dividend Income in India?

Investing in stocks and mutual funds helps grow your wealth and dividends are a key benefit.  It’s an extra income paid by companies to shareholders. However, dividends are taxable in India.

Earlier, companies paid a Dividend Distribution Tax (DDT), making dividends tax-free for investors. But since April 2020, the tax burden has shifted to investors, requiring them to report and pay taxes on dividend income.

Understanding the taxation of dividend income is very important, as tax rates vary for residents, NRIs and foreign investors. The tax treatment also differs for dividends from mutual funds and Indian or foreign companies.

Read on to know how tax on dividend income for individuals is calculated, applicable tax rates on dividends and ways to manage your tax liability.

What is Dividend Income?

Dividends are a portion of a company’s profit that is paid by companies to their shareholders. These payments are done either in cash or extra shares. One can receive dividends from:

• Indian or foreign company stocks
• Equity mutual funds (dividend option)
• Debt mutual funds (dividend option)

Earlier, dividends were tax-free for investors because companies used to pay a Dividend Distribution Tax (DDT). But from April 2020, the rules changed — now, investors have to pay tax on the dividends they receive.

How is Dividend Income Taxed?

The tax rate on dividends depends on whether you are an Indian resident, an NRI or a foreign investor:

• Indian residents: Dividends are added to your total income and taxed as per your income tax slab.
• NRIs: A flat 20% tax rate on dividends from Indian company shares applies.
• Foreign Portfolio Investors (FPIs): Also pay a 20% tax rate on dividends from Indian securities.
  

If you receive dividends from foreign companies, they are considered ‘Income from Other Sources’ and taxed at your regular income tax slab rate.

Do Companies Deduct TDS on Dividends?

Yes, companies do deduct TDS on dividends. You can check your Form 26AS to see how much TDS has already been deducted and you may need to pay the remaining tax when filing your income tax return.

The tax on dividends in India also includes Tax Deducted at Source (TDS):

• If you receive ₹5,000 or more in dividends from an Indian company, they will deduct 10% TDS before paying you.
• For NRIs and foreign investors, TDS is 20%.
  

Taxation of Dividend Income from Mutual Funds

How dividends from mutual funds are taxed depends on the type of fund:

• Equity Mutual Funds: Taxed as per your income tax slab.
• Debt Mutual Funds:

• If held for less than 3 years: Gains are added to your income and taxed according to your tax slab.
• If held for more than 3 years: Gains are taxed at 20% with indexation benefits, which reduces your tax liability.
  

Do You Need to Pay Advance Tax on Dividends?

If your total tax liability in a year exceeds ₹10,000, you are required to pay advance tax in installments:

• 15% by June 15
• 45% by September 15
• 75% by December 15
• 100% by March 15

If you don’t pay advance tax on time, you may have to pay interest under Sections 234B and 234C.

What About Foreign Dividends?

If you earn dividends from a foreign company, you might have already paid tax in that country. To avoid being taxed twice, India has Double Taxation Avoidance Agreements (DTAA) with many countries.

To claim tax relief, you need:

• A Foreign Tax Credit (FTC) form when filing your tax return
• Proof of tax paid abroad
  

Conclusion

Understanding the taxation of dividend income helps you avoid surprises at tax time. Whether you invest in Indian or foreign stocks or mutual funds, knowing the tax rules can help you plan better and reduce your tax burden.

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FAQs

1. How much are dividends tax-free?

No, the tax on dividends in India depends on your income tax slab. Companies deduct 10% TDS if your total dividend income exceeds ₹5,000 in a year.

2. Are dividends from foreign companies taxable?

Foreign dividends are considered ‘Income from Other Sources’ and taxed at your income tax slab rate. You can claim tax relief under DTAA if you’ve already paid tax in the foreign country.

3. How do I handle dividend income from joint accounts?

If a joint account receives dividend income, it is usually split based on the ownership percentage. Each person must report their share of the income while filing their tax return.