Direct and Indirect Taxation · Income from Other Sources

Taxability of Dividend Income under Income-tax Act 2025

Updated 10 October 2026 · Fact-checked

Dividend is income from other sources. It is taxed in the tax year in which it is declared, distributed or paid. Deemed dividend widens the meaning to cover certain distributions of company profits. To compute a resident's dividend income, take the gross dividend and deduct only the expenses the Act permits against it: interest on money borrowed to invest, capped at 20% of the dividend, and commission for collecting it.

Understand Dividend Income and Taxability

A dividend is a share of a company's profits paid to its shareholders. For the shareholder it is income, and unless it is business income of a share trader, it falls under Income from Other Sources.

Timing matters. Under section 7(2), a dividend declared by a company, or distributed or paid by it, is the income of the tax year in which it is declared, distributed or paid. An interim dividend is different. It is the income of the tax year in which the company unconditionally makes the amount available to the member entitled to it. So the date of a board resolution does not decide an interim dividend. The date it is made available does.

Deemed dividend comes from the definition of dividend in section 2(40). It treats some payments as dividend even though they are not called dividend. In plain words, these are distributions by a company out of its accumulated profits that benefit shareholders, such as a distribution on liquidation, a distribution on reduction of capital, and certain loans or advances to shareholders. The common thread is that the company is handing out profits it has retained. Check the exact clauses and conditions in your ICMAI study material. Section 68 shows how one of them works: when a company is liquidated, the shareholder is taxed under Capital gains on the money or market value of assets received, reduced by the amount assessed as dividend under section 2(40)(c). The dividend part is taxed as dividend, and only the rest goes into capital gains.

Special rules apply to some recipients. A domestic company that receives dividend from another domestic company, a foreign company or a business trust gets a deduction under section 148. The deduction is limited to the dividend it has itself distributed at least one month before the due date for filing its return under section 263(1). It cannot be claimed again in another tax year.

A non-resident (not a company) or a foreign company is taxed under section 207. Dividend is taxed at 20%, or 10% if it comes from a unit in an International Financial Services Centre. No deduction is allowed for expenses against this income.

Key rules to remember

Timing of dividend income: Declared, distributed or paid dividend → income of the tax year of declaration, distribution or payment. Interim dividend → income of the tax year it is unconditionally made available to the member.; This is section 7(2). For an interim dividend, the date of availability matters, not the date of declaration.
Dividend income of a resident (other sources): Dividend income = Gross dividend − interest on borrowed money used to earn it (maximum 20% of the dividend) − commission or remuneration paid for realising it; No other expense is allowed. The 20% cap is on the dividend, not on the interest paid. The cap and the commission deduction are stated here without a section number, as they are not in the law text supplied. Confirm the section in your ICMAI study material.
Liquidation distribution (shareholder): Capital gains consideration = Money received + market value of other assets on distribution date − amount assessed as dividend under section 2(40)(c); Section 68(2). The company itself is not treated as making a transfer (section 68(1)).
Inter-corporate dividend deduction (domestic company): Deduction = lower of (dividend received from domestic company, foreign company or business trust) and (dividend the company distributed at least one month before the due date of its return); Section 148. Once allowed for an amount, it cannot be claimed for that amount in another tax year.
Non-resident or foreign company: dividend rate: Dividend: 20%. Dividend from an IFSC unit: 10%.; Section 207(1). Section 207 also disallows deductions under sections 28 to 58, 60, 61 and 93 when computing this income, so no expenses are allowed. If gross total income consists only of this income, no deduction is allowed under Chapter VIII and Schedule XV (section 207(6)(a)). If there is other income too, reduce gross total income by this income and compute the Chapter VIII deduction on the remaining amount (section 207(6)(b)).

How to solve Dividend Income and Taxability questions

Use this order for any question on dividend income. It keeps your answer in the format examiners reward.

1Identify the recipient: resident individual or HUF, domestic company, non-resident, or foreign company. The rules differ for each.
2Identify the type of receipt: ordinary dividend, interim dividend, or a payment that is deemed dividend, such as a liquidation distribution or reduction of capital.
3Fix the tax year using section 7(2). For an interim dividend, use the date it was unconditionally made available.
4Show the gross dividend. Treat deemed dividend only up to the accumulated profits of the company. Treat the balance as capital gains where section 68 applies.
5For a resident, deduct only the expenses the Act permits against dividend: interest on borrowed money capped at 20% of the dividend, and commission for collection. Show the 20% workings. For a non-resident or foreign company, allow no expenses, because section 207 disallows the deductions under sections 28 to 58, 60, 61 and 93 for this income.
6For a domestic company, apply the section 148 deduction limit. For a non-resident or foreign company, apply the section 207 rate.
7State the head, Income from Other Sources, and the final figure. Add one line on any capital gains part.

Quickest way: Three-check shortcut for dividend questions

When to use it: Use it for numerical questions and MCQs when time is short.

Check who receives it. A non-resident means a flat rate and no expenses. A company means check the section 148 deduction.
Check what it is. If the question mentions liquidation, split the receipt into dividend and capital gains.
Compute: Gross dividend − the lower of interest paid and 20% of dividend − commission. Write each line so you earn step marks even if one figure is wrong.

Common mistakes in Dividend Income and Taxability

Deducting all the interest paid on a loan taken to buy shares.
Students think any expense incurred to earn income is deductible.
Fix: Cap the interest at 20% of the dividend. Compute 20% first and compare it with the actual interest. Take the lower.
Taxing an interim dividend in the tax year of declaration.
Students apply the rule for ordinary dividends to every dividend.
Fix: For an interim dividend, use the tax year in which the amount is unconditionally made available to the member.
Treating the whole liquidation receipt as capital gains.
Students see liquidation and think only of transfer of shares.
Fix: Under section 68(2), deduct the amount assessed as dividend under section 2(40)(c) from the receipt to get the capital gains consideration. Tax the dividend part as dividend.
Allowing expenses or Chapter VIII deductions against dividend of a non-resident.
Students apply the resident computation to every assessee.
Fix: Section 207 disallows deductions under sections 28 to 58, 60, 61 and 93 for this income, so allow no expenses. Where gross total income consists only of the specified income, including dividend, no deduction is allowed under Chapter VIII or Schedule XV (section 207(6)(a)). Where there is other income as well, reduce gross total income by the dividend and allow the Chapter VIII deduction on the remaining amount (section 207(6)(b)).
Claiming the section 148 deduction for the full dividend received.
Students forget the condition on the company's own distribution.
Fix: The deduction cannot exceed the dividend the company distributed at least one month before the due date for filing its return. Take the lower figure.
Using the Income-tax Act, 1961 terms such as assessment year.
Older books and notes still use the 1961 Act.
Fix: Write tax year and use the section numbers of the Income-tax Act, 2025.

Worked examples

Example 1

Mr. Rohan Mehta, a resident individual, receives dividends of ₹50,000 from Indian companies in tax year 2026-27. He had borrowed money to buy the shares and paid interest of ₹15,000. He paid ₹1,000 as commission to a bank for collecting the dividends. Compute his income from dividend.

Show the solution

Gross dividend = ₹50,000. It is taxed under Income from Other Sources.
Interest limit = 20% × ₹50,000 = ₹10,000. (This cap is the Act's deduction rule for dividend income; confirm the section number in your study material.)
Interest paid is ₹15,000. Allowed interest is the lower figure, ₹10,000.
Commission for collection = ₹1,000, allowed in full.
Dividend income = ₹50,000 − ₹10,000 − ₹1,000 = ₹39,000.

Answer: Income from dividend (Other Sources) = ₹39,000. Interest of ₹5,000 is disallowed.

Example 2

Company A Ltd goes into liquidation. Mrs. Sunita Rao, a resident shareholder, receives ₹5,00,000 in cash on liquidation. Of this, ₹1,80,000 is treated as dividend under section 2(40)(c). Her cost of acquiring the shares was ₹2,00,000. Compute the dividend and the capital gains.

Show the solution

Dividend income = ₹1,80,000, taxed as dividend under Income from Other Sources.
Under section 68(2), the full value of consideration = ₹5,00,000 − ₹1,80,000 = ₹3,20,000.
Section 68(1) means the company is not treated as making a transfer.
Capital gain = ₹3,20,000 − ₹2,00,000 = ₹1,20,000.
Whether the gain is short-term or long-term depends on how long she held the shares. Check the holding period in the question.

Answer: Dividend income = ₹1,80,000. Capital gain = ₹1,20,000, classified by holding period.

Exam tips

Write the tax year and the section numbers of the Income-tax Act, 2025. Examiners expect section 7(2), section 68, section 148 and section 207 where relevant.
Show the 20% interest cap as a separate line in every resident computation. It earns a step mark.
For MCQs, read the recipient first. The options often differ only in whether expenses or a section 148 deduction apply.
For a liquidation problem, always show the split between dividend and capital gains. Compute both heads separately.
Check dates. A question that gives declaration and payment dates is usually testing the interim dividend rule.

Practice questions from Income from Other Sources

Dividend Income and Taxability in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Dividend Income and Taxability: frequently asked questions

Under which head is dividend income taxed?

It is taxed under Income from Other Sources, unless the shares are held as stock-in-trade in a business. It is the income of the tax year in which it is declared, distributed or paid, as per section 7(2).

What is deemed dividend?

It is a payment by a company that the definition of dividend in section 2(40) treats as dividend, though it may not be called one. Distribution on liquidation is an example. Such payments are taxed as dividend up to the company's accumulated profits.

Can I deduct interest on a loan taken to buy shares from dividend income?

For a resident, yes, but only up to 20% of the dividend income. Commission or remuneration paid for collecting the dividend is also allowed. No other expense is deductible. These deductions are not in the section text supplied here, so confirm the section number in your ICMAI study material.

How is a non-resident taxed on dividend?

Section 207(1) taxes dividend at 20%, or 10% if it is from a unit in an International Financial Services Centre. Section 207 disallows deductions under sections 28 to 58, 60, 61 and 93, so no expenses are allowed. If this is the only income, no Chapter VIII or Schedule XV deduction is allowed. A return need not be filed if only this kind of income arises and tax has been deducted at source at not less than the specified rate.