NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Taxation (NISM XXI-A)

Taxation of Dividend, Interest and Other Income for NISM PMS Distributors

Updated 11 October 2026 · Fact-checked

Dividends and interest are taxed in your hands as Income from Other Sources at your slab rate. TDS is deducted, usually at 10% for residents with PAN, once thresholds are crossed. Against dividend you can only deduct interest on money borrowed to invest, capped at 20% of the dividend. Then apply slab and credit TDS.

Understand Taxation of Dividend, Interest and Other Income

Most money a PMS client earns apart from selling securities comes as dividend or interest. Neither is a capital gain. For an individual who is not running a business, both are normally taxed under the head Income from Other Sources.

Dividend is a share of profit paid by a company. Since FY 2020-21 the company no longer pays a dividend distribution tax. The shareholder is taxed instead, at the normal slab rate. The same approach applies to dividend from mutual fund units. A higher-income investor therefore pays more tax on the same dividend.

Interest comes from bank and company deposits, bonds, debentures and similar instruments. It is also added to total income and taxed at slab rates. Some interest is exempt, for example interest on tax-free bonds and on PPF. Do not assume all interest is taxable.

TDS (tax deducted at source) is an advance collection of tax by the payer. It is not an extra tax. The investor adds the gross income to the return and then claims credit for the TDS. If the PAN is not given, TDS is deducted at a higher rate (20% where that is higher than the normal rate). A person whose total income is below the taxable limit can give a declaration (Form 15G, or Form 15H for senior citizens) so that no TDS is deducted.

Expenses are narrow. Against dividend income, only interest paid on money borrowed to invest is allowed, and it is capped at 20% of the dividend income. Brokerage, advisory and PMS fees, and demat charges cannot be deducted against dividend. Against interest income, interest on borrowing used to earn it and the commission or fee paid to collect it can be claimed. The 20% cap does not apply to interest income.

Key formulas to remember

Head of income: Dividend and interest (non-business) → Income from Other Sources; Taxed at the investor's slab rate. Not a capital gain.
Deduction against dividend: Allowed = lower of (interest on borrowing for investment, 20% × dividend income); No other expense is allowed against dividend, including commission and fees.
Net dividend income: Taxable dividend = Gross dividend − allowed interest deduction; Always start from the gross dividend, not the amount received after TDS.
TDS on dividend (resident): 10% of dividend, if PAN is given and the payment crosses the annual threshold; The threshold was raised from ₹5,000 to ₹10,000 from FY 2025-26. Check the latest workbook figure. Once crossed, TDS applies on the whole amount.
TDS on interest other than securities (resident): 10% with PAN; higher rate (20%) without PAN; Thresholds differ for banks, other payers and senior citizens, and they change over time.
Tax credit: Tax payable = Tax on total income − TDS credit; TDS is adjusted against final tax. A refund arises if TDS is higher.
NRI dividend and interest: TDS usually at 20% plus surcharge and cess, subject to treaty benefit; Treated in more detail under the NRI topic.

How to solve Taxation of Dividend, Interest and Other Income questions

Use this order for any question on dividend, interest or TDS.

1Identify the income: dividend, interest, or something else such as capital gain. Check if it is exempt (tax-free bond, PPF).
2Confirm the head. For a non-business investor, dividend and taxable interest fall under Income from Other Sources.
3Write the gross amount. Ignore any TDS already cut, as the gross is what is taxable.
4List the expenses given. For dividend, keep only interest on borrowing and cap it at 20% of the dividend. For interest, allow interest on borrowing and collection charges.
5Compute the net taxable income and apply the slab rate if the question gives one.
6Check TDS: payer type, PAN given or not, threshold crossed or not, resident or NRI, and whether Form 15G or 15H applies.
7Deduct TDS from the tax payable to get the balance tax or refund.
8Match the result to exactly one option and watch the units and the rupee amount.

Quickest way: Three-check shortcut for MCQs

When to use it: Use it when the question asks for taxable income, an allowed expense or the TDS amount.

Dividend plus expenses: take the lower of the borrowing interest and 20% of the dividend. Ignore every other expense.
TDS: if the payee has PAN and the payment is above the threshold, apply 10% on the full amount. No PAN means the higher rate.
Head and rate: dividend and interest go at the slab rate, not a flat rate. Any option that says a special flat rate for a resident individual's dividend is a trap.

Common mistakes in Taxation of Dividend, Interest and Other Income

Treating dividend as exempt in the investor's hands.
Older rules exempted dividend and charged the company instead.
Fix: Remember that dividend is taxable at slab rate for the recipient. The old dividend distribution tax is gone.
Deducting brokerage, PMS fee or demat charges from dividend income.
Students assume every cost of earning income is deductible.
Fix: Only interest on borrowed money, capped at 20% of the dividend, is allowed against dividend.
Applying the 20% cap to the full borrowing interest when the interest is smaller.
Students read the cap as a fixed deduction.
Fix: The allowed deduction is the lower of actual interest and 20% of dividend.
Calculating TDS only on the amount above the threshold.
It is confused with the basic exemption limit.
Fix: Threshold decides whether TDS applies. Once crossed, TDS applies on the whole payment.
Thinking TDS is the final tax.
The deduction at source feels like a closed tax.
Fix: Income is still added to total income at slab rates. TDS is only a credit, so more tax may be due or a refund may arise.
Treating all interest as taxable.
The word interest is linked to taxable income.
Fix: Check for exempt instruments such as tax-free bonds and PPF before computing.

Worked examples

Example 1

Rohit, a resident individual, receives dividend of ₹1,20,000 from listed companies. He paid ₹30,000 interest on a loan taken to buy these shares and ₹5,000 as commission to his adviser. What is his taxable dividend income? Options: (a) ₹90,000 (b) ₹96,000 (c) ₹1,15,000 (d) ₹1,20,000

Show the solution

Gross dividend is ₹1,20,000.
Only interest on borrowing is allowed. The commission of ₹5,000 is not allowed.
Cap = 20% × ₹1,20,000 = ₹24,000.
Actual interest is ₹30,000, which is more than the cap, so the allowed deduction is the lower figure, ₹24,000.
Taxable dividend = ₹1,20,000 − ₹24,000 = ₹96,000.

Answer: (b) ₹96,000, taxed at Rohit's slab rate.

Example 2

A domestic company pays a dividend of ₹18,000 in a year to a resident individual shareholder who has given a valid PAN and no Form 15G or 15H. How much TDS is deducted? Options: (a) ₹0 (b) ₹900 (c) ₹1,800 (d) ₹3,600

Show the solution

The payee is a resident with PAN, so the TDS rate on dividend is 10%.
The payment of ₹18,000 is above the annual threshold, whether it is taken as ₹5,000 or ₹10,000.
Once the threshold is crossed, TDS applies on the whole amount.
TDS = 10% × ₹18,000 = ₹1,800.

Answer: (c) ₹1,800. It is a credit against the shareholder's final tax, not the final tax.

Exam tips

Expect direct rule questions: head of income, tax rate on dividend, and which expenses are allowed against it. Learn the 20% cap precisely.
Read the question for PAN, residency and threshold clues. They decide the TDS rate.
In calculations, always apply the lower-of rule to the borrowing interest before subtracting.
Do not guess when unsure. The negative marking in this exam is 10% of the marks of the question, so an informed guess on a 1-mark question costs little but a careless one still counts.
Thresholds and rates are updated in Finance Acts. Use the figures in the current NISM workbook if they differ from those in this page.

Practice questions from Taxation (NISM XXI-A)

Taxation of Dividend, Interest and Other Income in other exams

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

Taxation of Dividend, Interest and Other Income: frequently asked questions

How is dividend income taxed for an individual in India?

It is added to total income and taxed at the individual's slab rate under Income from Other Sources. The company may deduct TDS at 10% for a resident with PAN once the threshold is crossed. The TDS is later adjusted against the final tax.

What expenses can I deduct from dividend income?

Only interest on money borrowed to invest in the shares or units, and it is capped at 20% of the dividend income. Brokerage, fees and other costs cannot be deducted.

Is interest on bonds and fixed deposits taxable?

Yes, in most cases. It is taxed at slab rates as Income from Other Sources. Interest on instruments such as tax-free bonds and PPF is exempt.

How can TDS on interest or dividend be avoided?

If your total income is below the taxable limit, you can submit Form 15G, or Form 15H if you are a senior citizen, to the payer. Without it, TDS is deducted. You can still claim a refund by filing a return.