Dividend income is now fully taxable in the hands of investors at their income tax slab rate (5%, 20%, or 30%). TDS at 10% applies when annual dividends from a company or mutual fund exceed ₹10,000. The big change in 2026 is that interest on loans taken to invest in shares or mutual funds can no longer be deducted against dividend income the entire dividend is now taxed without any offset.
how dividend tax affects investors today
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 attract tds under section 194k. starting fy 2025-26, tds applies when annual dividends from a mutual fund exceed ₹10,000. the rate is 10% if pan is 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.
TDS threshold for mutual fund dividends:
| dividend amount | tds rate (pan provided) | tds rate (no pan) |
|---|---|---|
| up to ₹10,000 | no tds | no tds |
| above ₹10,000 | 10% | 20% |
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.
Impact on leveraged investments:
- investors using borrowed funds for dividend investing will see higher tax liability
- the tax efficiency of leveraged investment strategies is reduced
- interest may still be added to the cost of acquisition for capital gains calculation
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.
itr form selection:
- itr-1: for individuals with dividend income up to ₹50 lakh and no other complexities
- itr-2: for individuals with dividend income from foreign companies, AIFs, or capital gains
- itr-3: for individuals with business or professional income
- itr-1 cannot be used if dividends exceed ₹50 lakh
key reporting steps:
- report gross dividend, not net amount
- match tds with form 26as
- for foreign dividends, use schedule fsi and schedule tr
- keep dividend statements and tds certificates for verification
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.
