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NISM-Series-X-B: Investment Adviser (Level 2) · Income from Other Sources

Dividend Income and Interest on Securities: Tax Treatment for NISM

Updated 11 October 2026 · Fact-checked

Dividends received by a shareholder are taxable in the shareholder's hands under Income from Other Sources at normal slab rates. Interest on securities and bank deposits is also taxed under this head unless it is business income. Only interest expense, capped at 20% of dividend, can be deducted. TDS applies above set thresholds.

Understand Dividend Income and Interest on Securities

Since FY 2020-21, companies no longer pay dividend distribution tax. The shareholder pays tax on the dividend. For a resident investor, dividend is taxed under Income from Other Sources at the normal slab rate. There is no special lower rate and no exemption for large dividends.

Timing matters. An interim dividend is taxed in the year you unconditionally receive the payment or warrant. A final dividend is taxed in the year the shareholders declare it at the general meeting. Dividends from mutual funds (IDCW) are taxed the same way.

Interest on securities means interest on bonds, debentures, government securities and similar instruments. If you hold them as an investor, the interest is taxed under Income from Other Sources. If you hold them as stock-in-trade in a business, it is business income. Interest on bank fixed deposits, recurring deposits and savings accounts also falls under Income from Other Sources for an investor.

You may deduct only interest expense that you paid on money borrowed to earn the dividend. The deduction is capped at 20% of the dividend income. No other expense, such as demat charges or adviser fees, is allowed against dividend.

Tax is often deducted at source. TDS is only an advance payment of your tax. You still report the full income, then claim credit for the TDS in your return.

Key formulas to remember

Head of income
Dividend, interest on securities, bank interest → Income from Other Sources (investor)
If securities are held as stock-in-trade, interest is business income.
Rate on dividend (resident)
Taxed at normal slab rates
No special rate. Dividend distribution tax on companies ended from FY 2020-21.
Deduction against dividend
Allowed deduction = lower of (interest expense paid, 20% × dividend income)
Only interest expense qualifies. No other expense is allowed.
Taxable dividend
Taxable dividend = Dividend − allowed interest deduction
Gross the dividend up first if TDS was cut.
TDS on dividend (resident)
10% when dividend from a company to a resident exceeds ₹10,000 in the year
Threshold applies from FY 2025-26 (earlier ₹5,000). Once crossed, TDS is on the whole amount.
TDS on interest on securities
10% for residents under Sec 193, with exceptions
Exceptions include interest on listed debentures in demat form and certain government securities (for example, 8% Savings Bonds up to a threshold). Check the question for conditions.
TDS on bank interest
10% when interest from a bank exceeds ₹50,000 (₹1,00,000 for senior citizens) in the year
Thresholds from FY 2025-26. The threshold is per bank, per year.
Savings interest deduction (old regime)
Non-seniors: up to ₹10,000 on savings account interest only (Sec 80TTA). Senior citizens: up to ₹50,000 on savings and deposit interest (Sec 80TTB), in place of 80TTA.
Both are available only under the old regime. Sec 80TTA does not cover FD or RD interest, and senior citizens are not eligible for 80TTA.

How to solve Dividend Income and Interest on Securities questions

Use the same sequence for any question on dividend, interest and TDS. Read what the question gives you first, then decide the head, the deduction and the TDS.

  1. 1Identify the receipt: dividend, interest on securities, bank interest or mutual fund IDCW.
  2. 2Check whether the person is a resident investor or holds the securities as business stock. This fixes the head of income.
  3. 3Add the gross amount. If the question gives a net amount after TDS, gross it up before taxing.
  4. 4For dividend, work out the deduction: the lower of the interest expense and 20% of the dividend. Ignore all other expenses.
  5. 5Apply the old-regime deductions for savings or deposit interest only if the question says the old regime applies.
  6. 6Tax the result at the slab rate given. Do not apply a special rate unless the question states one.
  7. 7Check TDS: compare the annual amount from each payer with the threshold, because thresholds are per payer. For dividend (Sec 194) and bank interest (Sec 194A), once the threshold is crossed, TDS is on the whole amount, at the given rate.
  8. 8Treat TDS as a credit against final tax, not as the final tax.

Quickest way: Three-question check

When to use it: Use it for MCQs when you have under a minute per question.

  1. Who pays the tax? The shareholder, at slab rates, under Income from Other Sources.
  2. What can be deducted? Interest expense only, up to 20% of dividend.
  3. Does TDS apply? Compare the yearly total from each payer with the threshold. For dividend and bank interest, if it is crossed, TDS is on the full amount (10% for dividend).

Common mistakes in Dividend Income and Interest on Securities

  • Treating dividend as exempt in the shareholder's hands

    Older rules exempted dividend because the company paid distribution tax.

    Fix: Remember that from FY 2020-21 dividend is taxable for the shareholder at slab rates.

  • Deducting demat charges, brokerage or adviser fees from dividend

    Students assume all costs of earning income are deductible.

    Fix: Only interest expense is allowed, capped at 20% of the dividend.

  • Applying the 20% cap to the interest expense instead of the dividend

    The wording sounds like a cap on the loan interest.

    Fix: Take 20% of the dividend, then pick the lower of that and the interest actually paid.

  • Deducting TDS only on the excess over the threshold

    Students mix it with slab-style logic.

    Fix: When the threshold is crossed, TDS applies to the entire amount.

  • Treating securities interest as business income for every investor

    The word 'securities' suggests trading.

    Fix: Investor holding means Income from Other Sources. Business income applies only to stock-in-trade.

  • Treating TDS as the final tax

    The tax appears to be already paid.

    Fix: Include the gross income in your return and claim TDS as credit. Extra tax is payable if your slab is higher.

Worked examples

Example 1

A resident individual receives dividend of ₹60,000 from listed companies in a year. She paid ₹20,000 as interest on a loan taken to buy these shares. What is her taxable dividend income?

Show the solution
  1. Dividend income is taxed under Income from Other Sources.
  2. The cap on deduction is 20% × ₹60,000 = ₹12,000.
  3. Interest actually paid is ₹20,000.
  4. Allowed deduction is the lower figure, ₹12,000.
  5. Taxable dividend = ₹60,000 − ₹12,000 = ₹48,000.

Answer: ₹48,000 is taxed at her slab rate.

Example 2

A resident individual receives dividend of ₹24,000 from a listed company during FY 2025-26. How much TDS is deducted on it? Options: Nil; ₹2,400; ₹4,800; ₹1,200.

Show the solution
  1. TDS on dividend to a resident is 10% if the dividend exceeds ₹10,000 in the year.
  2. ₹24,000 is above ₹10,000, so TDS applies.
  3. TDS is on the whole amount: 10% × ₹24,000 = ₹2,400.
  4. The ₹2,400 is a credit against her final tax. It is not the final tax.

Answer: ₹2,400

Exam tips

  • Expect questions that test head of income. Dividend and interest on securities, for an investor, go to Income from Other Sources.
  • Questions on the 20% cap usually give a loan interest figure larger than the cap. Compute the cap and take the lower figure.
  • For TDS questions, find the year and the threshold, then check whether the payer is a company, bank or other. Rates and thresholds differ.
  • Read for words like 'old regime' and 'senior citizen'. They change which deduction applies.
  • Because wrong answers lose marks, skip a TDS-threshold question only if you cannot recall the figure. Otherwise eliminate options that are fully taxed or exempt.

Practice questions from Income from Other Sources

Dividend Income and Interest on Securities 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 Interest on Securities: frequently asked questions

How is dividend taxed for a resident shareholder?

It is added to the shareholder's income under Income from Other Sources and taxed at the normal slab rate. The company does not pay dividend distribution tax any more. Only interest expense up to 20% of the dividend is deductible.

Under which head is interest on securities taxable?

For an investor it is taxed under Income from Other Sources. If the securities are held as stock-in-trade as part of a business, it is business income instead.

Is TDS deducted on dividend?

Yes. A company deducts TDS at 10% from dividend paid to a resident if the dividend in the year exceeds the threshold, which is ₹10,000 from FY 2025-26. Once it is crossed, TDS applies to the whole amount.

Can I claim expenses against interest income?

For an investor, interest income is generally taxed on the gross amount. Savings or deposit interest deductions, where available, apply only under the old regime and are capped.