dividend income is no longer tax-free. it became taxable in the hands of investors from april 1, 2020, after the dividend distribution tax was abolished. the company no longer pays tax before distributing dividends. the investor pays the tax.
the change has made dividend taxation a direct part of an investor’s annual tax calculation.
the basic rule. dividends are taxed at slab rates
dividend income is added to total income and taxed at the applicable income tax slab rate. an investor in the 30% bracket pays 30% on dividends. an investor in the 5% bracket pays 5%.
this applies to dividends from shares, mutual funds, and other investments. the gross dividend amount must be reported. not the post-tds amount.
tds under section 194k
mutual fund dividends are subject to tds under section 194k. from fy 2025-26 onwards, tds is deducted if the total dividend from a mutual fund exceeds ₹10,000 in a financial year. the rate is 10% if pan is provided. 20% if pan is not provided.
tds applies even if the dividend is reinvested. if ₹15,000 is declared under the reinvestment option, ₹1,500 is deducted as tds. ₹13,500 is reinvested. the full ₹15,000 must be reported as income in the itr.
tds does not apply to mutual fund redemptions or capital gains on redemption. capital gains are taxed separately under capital gains rules.
the budget 2026 change. interest deduction removed
under the old rules, investors could deduct interest expenses on loans taken to invest in shares or mutual funds. the deduction was capped at 20% of dividend income.
budget 2026 removed this deduction from april 1, 2026. the entire dividend income is now taxable on a gross basis. no interest offset is allowed.
example. an investor with ₹6 lakh dividend income and ₹1 lakh interest on a loan taken to invest in shares. under the old rules, the taxable dividend income was ₹5 lakh. under the new rules, the taxable dividend income is ₹6 lakh. the tax increase is significant.
how to report dividend income
dividend income is reported under “income from other sources” in schedule os of the itr. the gross dividend amount (before tds) must be entered. tds deducted can be claimed as credit.
the annual information statement and form 26as should be checked before filing. mismatches can trigger scrutiny notices.
frequently asked questions
1. is dividend income taxable in india?
yes. dividends received on or after april 1, 2020 are taxable in the hands of the investor at applicable slab rates.
2. what is the tds rate on mutual fund dividends?
10% if pan is provided. 20% if pan is not provided. tds applies if annual dividend exceeds ₹10,000 per mutual fund scheme.
3. can interest on loans for investments be deducted from dividend income?
from april 1, 2026, no. the deduction for interest expenses on loans taken to invest in shares or mutual funds has been withdrawn.
4. where is dividend income reported in itr?
under “income from other sources” in schedule os. the gross dividend amount must be reported.
5. what happens if dividend income is not reported?
mismatches with ais and form 26as can trigger tax notices. penalties may apply.
