Taxation · Income from Other Sources

Dividend Income and Related Deductions under Income from Other Sources

Updated 5 October 2026

Dividend income is taxed in the hands of the shareholder under Income from Other Sources, whether it comes from an Indian or a foreign company. Deemed dividend (certain loans, liquidation or capital reduction payouts) is also taxed, up to accumulated profits. The only deduction is interest, capped at 20% of dividend income.

Understand Dividend Income and Related Deductions

Dividend is a share of a company's profit paid to its shareholders. Since 1 April 2020, companies no longer pay a separate dividend distribution tax. The shareholder pays tax on dividend at their own rate. This is the key change to remember.

Dividend is taxed under Income from Other Sources. This is true even if the shareholder is a trader in shares. It applies to dividend from domestic companies, foreign companies and mutual fund units. A resident is taxed on dividend wherever it arises. A non-resident is taxed only on dividend that is received in India or accrues or arises in India. Dividend is taxed at the rate applicable to the person: normal slab rates for an individual, or the rate for the type of person, subject to surcharge, cess and any tax treaty.

Tax is deducted at source on dividend paid to a non-resident (including a foreign company) at the rate in force under the Act. That rate is commonly 20% plus applicable surcharge and cess, and the treaty rate applies where it is more beneficial. Surcharge and cess depend on the recipient and the provision, so do not assume they apply the same way to every non-resident. That TDS rate is not automatically the final tax. The final tax follows the rate applicable to the person, or the rate fixed by a specific provision for that class of income or investor. Follow the rate given in the question.

Timing matters. An interim dividend is taxable in the tax year in which it is unconditionally made available to the shareholder. A final dividend is taxable in the tax year in which it is declared by the company, that is, approved by the shareholders at the AGM.

Deemed dividend is a payment that is not called a dividend but is treated as one, to the extent the company has accumulated profits. It covers:

a distribution of accumulated profits that entails release of the company's assets to its shareholders. If no asset of the company is released, this case does not apply;
distribution of debentures, debenture-stock or deposit certificates (with or without interest) to shareholders, and issue of bonus shares to preference shareholders. These are deemed dividend only to the extent of accumulated profits. For debentures or deposit certificates, the amount is their value. For bonus shares to preference shareholders, the amount is the face value of the shares issued. In both cases it is limited to accumulated profits;
payment to shareholders on liquidation, to the extent attributable to the accumulated profits of the company immediately before liquidation, whether those profits are capitalised or not;
payment to shareholders on reduction of capital, to the extent of the accumulated profits the company possesses, whether those profits are capitalised or not;
a loan or advance by a company in which the public are not substantially interested (a closely held company), and any payment made on behalf of or for the individual benefit of the shareholder.

Check these cases against the wording of the dividend definition in the Income-tax Act, 2025, as given in your ICAI study material for the tax year.

For liquidation and reduction of capital, the accumulated profits test counts profits that have been capitalised as well as those that have not. Some payouts are excluded. A payment on liquidation or reduction of capital is not deemed dividend where it is made on shares issued for full cash consideration and the holder has no right to share in the surplus assets on liquidation. Also, bonus shares issued to equity shareholders are not dividend.

For the loan case, the loan or advance must be given to a shareholder who is the registered holder and beneficial owner of at least 10% of voting power, or to a concern in which that shareholder is a member or partner and has a substantial interest. Substantial interest in a concern means the shareholder holds at least 20% of the voting power (where the concern is a company) or at least 20% of the income of the concern, that is, the share in its profits (where the concern is a firm or other concern), at any time during the tax year. So for a loan to a concern, the shareholder must hold at least 10% voting power in the lending company and must also be a member or partner of the concern with the substantial interest.

For the loan case, accumulated profits are those the company possesses on the date of payment of the loan or advance. This includes profits up to the end of the preceding year and the current year's profits up to that date.

For these deemed dividend cases, the relevant year is the year in which the asset is distributed or the payment is made. Loans made in the ordinary course of business by a company whose substantial business is money lending are excluded.

On deductions, the rule is narrow. Only interest expense incurred to earn the dividend is allowed, and it cannot exceed 20% of the dividend income included in total income. No other expense, such as demat charges, commission, brokerage or remuneration paid to collect the dividend, is allowed.

Key rules to remember

Head of income: Dividend (domestic, foreign, mutual fund) → Income from Other Sources; Applies even if you trade in shares. Taxed in the shareholder's hands at the applicable rate.
Maximum interest deduction: Allowed interest = lower of (actual interest on funds borrowed to invest) and (20% × dividend income); Dividend income here is the amount included in total income, before this deduction. Excess interest is lost and cannot be carried forward.
Net dividend income: Net dividend income = Gross dividend − allowed interest; No deduction for any other expense, even if it was incurred to earn the dividend.
Deemed dividend on loan: Deemed dividend = lower of (loan or advance) and (accumulated profits on the date of payment of the loan or advance); Only for a company in which the public are not substantially interested (closely held), lending to a shareholder with at least 10% voting power, or to a concern in which such shareholder is a member or partner and has a substantial interest (at least 20% of voting power for a company, or at least 20% of the income of the concern, that is, the share in its profits, for a firm or other concern, held at any time during the tax year). For a concern, the shareholder must also hold at least 10% voting power in the lending company. Accumulated profits include profits up to the end of the preceding year and the current year up to the date of payment. It is taxed in the hands of the shareholder.
Other deemed dividend: Deemed dividend = lower of (amount distributed) and (accumulated profits), where amount = value of assets released, or value of debentures or deposit certificates, or face value of bonus shares issued to preference shareholders; Applies to asset distribution that releases the company's assets, debentures or deposit certificates to shareholders, bonus shares to preference shareholders, liquidation and capital reduction. All are deemed dividend only to the extent of accumulated profits. For liquidation and capital reduction, accumulated profits count whether capitalised or not, and payouts on shares issued for full cash consideration with no right to surplus assets on liquidation are excluded. Bonus shares to equity shareholders are not dividend.
Rate on dividend of a non-resident: TDS = rate in force under the Act (commonly 20% plus applicable surcharge and cess), or the treaty rate if more beneficial; final tax = rate applicable to the person or a specific provision; The TDS rate on a non-resident is not automatically the final rate. Surcharge and cess depend on the recipient and provision. Follow the rate given in the question.

How to solve Dividend Income and Related Deductions questions

Use this method for any question on dividend income, deemed dividend or related deductions.

1List every receipt from companies or funds. Mark each as actual dividend (domestic, foreign, mutual fund) or a deemed dividend case (loan, asset distribution, debentures or deposit certificates, bonus shares to preference shareholders, liquidation, capital reduction).
2Check residential status. A resident is taxed on dividend from anywhere. A non-resident is taxed only on Indian-source or India-received dividend.
3Check the tax year of each dividend. Interim: when unconditionally made available. Final: when declared (approved at the AGM). Drop items belonging to another year.
4For deemed dividend on a loan, test the conditions: a company in which the public are not substantially interested (closely held), a shareholder with at least 10% voting power (and, for a concern, the shareholder is a member or partner with a substantial interest, meaning at least 20% of voting power in a company, or at least 20% of the income of the concern in other cases), and the accumulated profits on the date of payment of the loan. Deemed dividend is the lower of the amount and accumulated profits.
5For other deemed dividend, take the value of the assets released or of the debentures or deposit certificates, or the face value of bonus shares issued to preference shareholders. Limit it to accumulated profits. For liquidation and capital reduction, count accumulated profits whether capitalised or not, and exclude payouts on shares issued for full cash consideration with no right to surplus assets.
6Add all dividend to get gross dividend income, with foreign dividend in rupees as received.
7Identify interest on borrowing used to earn dividend. Compute 20% of gross dividend. Allow the lower figure.
8Reject all other expenses such as demat fees, brokerage, advisory fees and collection charges. Say so in your answer.
9Write the net dividend income. Show it as Income from Other Sources and apply the rate applicable to the person (slab rate for a resident individual; for a non-resident, the normal rate for the person subject to treaty, or a special rate only where the question or a specific provision gives one).

Quickest way: Three-line check for MCQs and written answers

When to use it: Use when the question gives a list of receipts and expenses and you have little time.

Add every dividend in the year. Then compute 20% of that total.
Compare the 20% figure with the interest actually paid. Take the lower. Ignore all other expenses completely.
For deemed dividend on a loan, take the lower of the loan and accumulated profits on the date of payment. Check the 10% voting power test first. For a loan to a shareholder, holding below 10% gives nil. For a loan to a concern, the shareholder must hold at least 10% voting power in the company and be a member or partner of the concern with a substantial interest (at least 20% of voting power in a company, or at least 20% of the income of the concern in other cases), or the answer is nil.
MCQ trap: options usually include the full interest deducted, or all expenses deducted. Eliminate those first.
Written format: show a small table-like list with gross dividend, deduction (with the 20% working), and net income. Step marks are given for the working of 20% and for stating that other expenses are not allowed.

Common mistakes in Dividend Income and Related Deductions

Deducting the full interest paid on a loan taken to buy shares.
Students treat it like business interest, which is allowed in full.
Fix: Always compute 20% of dividend income and allow the lower figure. Write the working in your answer.
Allowing demat charges, brokerage or advisory fees as deductions against dividend.
The word 'related deductions' makes students think many expenses are allowed.
Fix: Only interest is allowed. State clearly that other expenses are disallowed.
Treating foreign company dividend as exempt or at a lower fixed rate for a resident.
Students remember older concessional rules.
Fix: For a resident, foreign dividend is taxed under Other Sources at the rate applicable to the person, like any other dividend. Convert to rupees as the question states.
Taxing deemed dividend at the full loan amount.
Students forget the accumulated profits ceiling.
Fix: Deemed dividend is the lower of the loan and accumulated profits on the date of payment of the loan.
Applying the deemed dividend loan rule to a shareholder holding less than 10% voting power, to a loan to a concern where the shareholder lacks 10% voting power, or to a widely held company.
Students remember the rule but skip the conditions.
Fix: Test these first: the company is one in which the public are not substantially interested (closely held); the shareholder is the registered holder and beneficial owner of at least 10% voting power (this applies to a concern loan too); for a concern, the shareholder is a member or partner with a substantial interest (at least 20% of voting power in a company, or at least 20% of the income of the concern in other cases); and the loan is not in the ordinary course of a money-lending business.
Taxing the dividend in the wrong year, for example taxing a final dividend in the year it is paid instead of the year it is declared, or ignoring the date an interim dividend was made available.
Students use cash receipt as the only test.
Fix: Read the dates. Interim dividend: taxable when unconditionally made available. Final dividend: taxable in the year it is declared at the AGM.

Worked examples

Example 1

Mr. Rahul, a resident individual, received the following in the tax year 2026-27: interim dividend from an Indian company ₹60,000, unconditionally made available to him in the year; final dividend from an Indian company ₹40,000, declared at the AGM in the year and paid in the year; dividend from a foreign company ₹50,000 received by him in the year; dividend from a mutual fund ₹10,000. He paid interest of ₹40,000 on a loan taken to buy these shares and demat and advisory charges of ₹5,000. Compute his income from dividend.

Show the solution

Timing check: the interim dividend was made available in the year and the final dividend was declared in the year, so both fall in the tax year 2026-27.
Gross dividend = ₹60,000 + ₹40,000 + ₹50,000 + ₹10,000 = ₹1,60,000.
All items are taxable for a resident under Income from Other Sources, including the foreign dividend and mutual fund dividend. Each is taxed at the rate applicable to Mr. Rahul.
Interest cap = 20% × ₹1,60,000 = ₹32,000.
Interest paid is ₹40,000. Allowed interest is the lower figure, ₹32,000. The excess ₹8,000 is not allowed and is not carried forward.
Demat and advisory charges of ₹5,000 are not allowed.
Net dividend income = ₹1,60,000 − ₹32,000 = ₹1,28,000.

Answer: Income from dividend under Income from Other Sources is ₹1,28,000.

Example 2

X Ltd. is a company in which the public are not substantially interested (closely held). On 1 October 2026 it gave a loan of ₹4,00,000 to Mr. Amit, who holds 12% of its voting power as registered holder and beneficial owner. Its accumulated profits on that date, including profits up to the end of the preceding year and the current year up to that date, are ₹6,00,000. On 1 December 2026 it gave a loan of ₹2,00,000 to Mr. Charu, who holds 8% of its voting power. Neither loan is in the ordinary course of business. Compute the deemed dividend and say in whose hands it is taxable.

Show the solution

X Ltd. is closely held, so the loan rule can apply.
Mr. Amit holds 12% of voting power, which is at least 10%. The loan to him is covered.
Deemed dividend for Mr. Amit = lower of loan ₹4,00,000 and accumulated profits on the date of payment (1 October 2026) ₹6,00,000 = ₹4,00,000.
Mr. Charu holds 8% of voting power, which is less than 10%. The loan to him is not deemed dividend, whatever the accumulated profits on 1 December 2026. Deemed dividend = nil.
Deemed dividend is taxed in the hands of the shareholder who received the loan, here Mr. Amit, under Income from Other Sources.
Repayment of the loan later does not reverse the deemed dividend in this year.

Answer: Deemed dividend of ₹4,00,000 is taxable in the hands of Mr. Amit. Nothing is taxable as deemed dividend for Mr. Charu.

Exam tips

In MCQs, the 20% interest cap is the most tested point. Compute 20% of the dividend first, then compare with interest.
In a mixed income question, put dividend under Income from Other Sources even if the person is a share trader or has other business income.
For deemed dividend on a loan, always write the conditions: company in which the public are not substantially interested (closely held), 10% voting power, 20% substantial interest where a concern is involved, and accumulated profits. Marks are given for each condition.
Check whether the question says the person is a resident or a non-resident. It changes the taxability of foreign dividend. For rates, use the rate applicable to the person unless the question gives a special rate.
Questions on the 2026-27 tax year follow the Income-tax Act, 2025 as amended by the Finance Act, 2026. If a question involves a company buyback, follow the treatment in your ICAI study material for that tax year rather than any older memory.

Practice questions from Income from Other Sources

Dividend Income and Related Deductions: frequently asked questions

Is dividend income taxable in the hands of the shareholder?

Yes. The shareholder pays tax on dividend under Income from Other Sources at their own rate. The company no longer pays a separate tax on the dividend it distributes.

How much interest can I deduct against dividend income?

You can deduct interest on money borrowed to invest in the shares, up to 20% of the dividend income included in total income. Any excess interest is lost. No other expense is allowed.

What is deemed dividend?

It is a payment that is treated as dividend even though it is not declared as one, such as a loan by a company in which the public are not substantially interested (a closely held company) to a shareholder with at least 10% voting power, or to a concern in which that shareholder has a substantial interest. It is taxed only up to the company's accumulated profits.

Is foreign company dividend taxable for a resident in India?

Yes. A resident is taxed on dividend from any company, Indian or foreign, under Income from Other Sources at the rate applicable to the person. Use the rupee value given in the question and apply the interest cap rule in the same way.