What Is Corporate Dividend Tax

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When you buy shares of a company, you become a part-owner. Now, if the company earns a profit, it may distribute a portion of it to you as a “dividend”. At this point, a common question several investors have is:

• Are dividends taxable in their hands?

This confusion largely arises from the earlier tax system (applicable up to FY 2019-20), when companies paid Dividend Distribution Tax (DDT) before transferring dividends. Until then, investors were not required to directly pay tax on their dividend income. However, the tax rules have now changed. 

Are you unsure about how dividends are taxed today? Read this article to first learn what the corporate dividend tax was and then see how dividends are taxed in FY 2025-26. Next, understand whether any deduction is allowed from dividend income.

What was the Corporate Dividend Tax?

Corporate dividend tax [also known as Dividend Distribution Tax (DDT)] was a tax paid by an Indian domestic company (under Section 115-O of the Income Tax Act) on the profits it distributed as dividends to shareholders. 

Up to FY 2019-20 (AY 2020-21), if a shareholder received a dividend, it was exempt from tax in their hands under Section 10(34). So, under the old system, the burden of paying income tax on the dividend income was on the company and not on the investor.

What Changed After April 1, 2020?

The Finance Act, 2020, abolished DDT from April 1, 2020. Since then, Indian domestic companies are not legally required to pay corporate dividend tax. Instead, the distributed dividend is taxed in the hands of shareholders at their applicable slab rates.

Along with this change, the government also introduced Tax Deducted at Source (TDS) on dividend payments. If the total dividend you receive from a company or mutual fund exceeds ₹10,000 (earlier threshold was ₹5,000 up to FY 2024–25), the company must deduct TDS @ 10%. For more clarity, let’s study an example:

Example

Mr. Rahul receives ₹22,000 as a dividend from an Indian company on February 13, 2026. Now, since ₹22,000 is more than ₹10,000, the company will deduct TDS at 10%. 

A TDS amount of ₹2,200 (₹22,000 × 10%) will be deducted, and Rahul will receive ₹19,800 (₹22,000 − ₹2,200).

Is Deduction of “Expenses” Allowed from Dividend Income?

For FY 2025-26 (AY 2026-27), you can claim a deduction for “interest expenses” incurred to earn dividend income (under Section 57). This deduction is limited to 20% of the gross dividend income received. 

Any other expense (say, brokerage, commission, or collection charges) is not deductible against dividend income. For example:

• Let’s say you took a loan of ₹40,000 @ 12% to invest in shares. 
• Thus, your annual interest expense is ₹4,800 (₹40,000 x 12%).
• Assume that your dividend income for the year is ₹10,000 (before TDS). 

Now, the maximum deduction allowed is ₹2,000 (20% of ₹10,000), even though your actual interest expense is ₹4,800.

However, after the latest changes introduced in the Union Budget 2026, this interest deduction has now been removed. From FY 2026-27 onwards, no deduction will be allowed against dividend income (including interest expense). As a result, 100% of the dividend amount received will be taxable in the hands of the investor. 

To Conclude, the Corporate Dividend Tax Was Abolished in FY 2020-21

So now you know that corporate dividend tax was abolished by the Finance Act, 2020, and since FY 2020–21, companies are not under a legal obligation to pay Dividend Distribution Tax (DDT). 

The impact? This change shifted the tax burden into the hands of investors. Dividend income is now 100% taxable in the hands of shareholders under the head “Income from Other Sources” (without any deduction). Also, TDS is deducted @ 10% if your dividend income exceeds ₹10,000. 

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Citation

• Tax treatment of dividend received.pdf (Income Tax Tutorials)

What Is Corporate Dividend Tax FAQs

1. When was DDT removed?

Dividend Distribution Tax (DDT) was abolished by the Finance Act, 2020. This change became effective from April 1, 2020, that is, from FY 2020–21 onward. 

2. What is the cut-off date for making “new investments” to claim a deduction?

Dividends arising from investments made after January 31, 2026, will not qualify for the earlier interest deduction benefit. Even if the dividend is received in FY 2026–27, it must relate to an investment made on or before January 31, 2026, to be eligible.

3. What is the latest TDS threshold for 2026?

For FY 2026–27, TDS on dividends is deducted @ 10% if the total dividend paid to a resident shareholder exceeds ₹10,000 in a financial year. The company deducts this amount before payment and reports it in Form 26AS.

4. How to report dividend income in your Income Tax Return (ITR)?

At the time of filing ITR, dividend income must be added to your total income under the head “Income from Other Sources”. Also, you must report the total dividend received, not just the amount after TDS deduction.

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