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Corporate Dividend Tax refers to the taxation of corporate profits distributed to shareholders. In India, the former Dividend Distribution Tax (DDT) paid by companies was abolished in 2020. Now, dividends are treated as taxable income in the hands of the investor, taxed directly at their applicable income tax slab rates
Current Rules and Tax Impact
- Abolition of DDT: Prior to April 1, 2020, domestic companies paid DDT (under Section 115-O) at roughly 15% before distributing earnings. This system is no longer in effect.
- Taxability: Dividend earnings are added to your total income and taxed according to your individual income tax slab. This can lead to a higher overall tax impact for high-net-worth individuals.
- TDS Threshold: Companies deduct a 10% Tax Deducted at Source (TDS) on dividend payouts exceeding ₹5,000 in a financial year.
- Non-Residents: Dividends paid to non-resident shareholders are generally taxable at 20% (or the applicable Double Taxation Avoidance Agreement treaty rate).
Are you unsure about how dividends are taxed today? Read this article to first learn what the corporate dividend tax wasand 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.
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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 a 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.
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To Conclude, the Corporate Dividend Tax Was Abolished in FY 2020-21
So now you know that the 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
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.
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.
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.
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.
Disclaimer:
This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.
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