Dividend Income
Dividend income refers to the earnings received by a shareholder from a company out of its profits. When a company distributes a portion of its profits to its shareholders, that payment is called a dividend.
Under the Income Tax Act, 1961, dividend income is taxable in the hands of the shareholder.
Types of Dividend
- Interim Dividend: Declared during the financial year
- Final Dividend: Declared at the Annual General Meeting (AGM)
- Special Dividend: One-time dividend paid under special circumstances
Tax Treatment in India
- Dividend is taxed under the head “Income from Other Sources”
- Taxed at applicable slab rates in the hands of the investor
- TDS applicable under Section 194 if dividend exceeds ₹5,000 in a financial year
Deduction on Expenses
- Only interest expense can be claimed as a deduction
- Deduction is capped at 20% of dividend income
- No other expenses are allowed as deductions
Why it Matters
- Impacts overall tax liability for investors
- Important for portfolio and income planning
- Affects post-tax returns from equity investments
- Requires proper reporting in income tax returns
Important Note
Earlier, companies paid Dividend Distribution Tax (DDT), making dividends tax-free for investors. This system has been abolished, and now dividends are fully taxable in the hands of shareholders.
