Tax on dividends
Part of Tax on investments. 5 min read. Free lesson with a short video, quiz and practice.
A dividend is a share of profit that a company pays to its shareholders. Mutual funds can also pay out money through the IDCW option (income distribution cum capital withdrawal). Since April 2020, dividends are taxed in the hands of the investor who receives them.
How dividends are taxed
- Dividends are added to your income under "other sources" and taxed at your slab rate.
- There is no separate exemption limit for dividends.
- From 1 April 2026, you can no longer deduct interest paid on money borrowed to earn dividends or mutual fund income (earlier, up to 20% of the dividend was allowed).
TDS on dividends
A company or fund deducts 10% TDS if it pays you more than ₹10,000 in dividends in a tax year. Without your PAN, the rate is higher. If your total tax will be nil, you can submit Form 121 to avoid TDS.
A worked example
Farah receives ₹15,000 in dividends from Company A during the year. Because it is above ₹10,000, Company A deducts 10%: ₹1,500.
Farah's top slab is 20%. Tax on the dividend: 20% × ₹15,000 = ₹3,000, plus 4% cess = ₹3,120. TDS has covered ₹1,500, so she pays the remaining ₹1,620 when filing (or through advance tax).
Who gets the dividend
Each company announces a record date. With T+1 settlement, you must buy the share before the ex-dividend date, which is usually the same day as the record date, to receive the dividend. On the ex-date, the share price usually falls by about the dividend amount, so a dividend is not free money.
Dividend vs growth option in funds
In the IDCW option, the payout reduces the fund's NAV and is taxed at your slab rate each time. In the growth option, nothing is paid out; you pay capital gains tax only when you sell, often at lower equity rates. Your tax slab affects which option leaves you more after tax.
Buybacks are different
When a company buys back its own shares, from 1 April 2026 the money you receive is taxed as a capital gain (sale price minus your cost), not as a dividend. Promoters pay an extra amount on buybacks.
Key takeaways
- Dividends are taxed at your slab rate, with no separate exemption.
- Companies and funds deduct 10% TDS if dividends exceed ₹10,000 a year.
- From 1 April 2026, interest on loans used to earn dividends is not deductible.
- The share price usually falls by about the dividend on the ex-date.
- From 1 April 2026, buyback proceeds are taxed as capital gains, not dividends.
Quick quiz
How are dividends taxed for an individual?
Answer: At the slab rate. Dividends are added to income and taxed at the slab rate.
Above what yearly amount does a company deduct TDS on your dividends?
Answer: ₹10,000. TDS applies when dividends from one payer exceed ₹10,000 in the year.
What usually happens to the share price on the ex-dividend date?
Answer: It falls by about the dividend. The company is paying cash out, so the price usually drops by about that amount.
From 1 April 2026, money from a buyback is taxed as…
Answer: A capital gain. Buyback proceeds are now taxed as capital gains for shareholders.