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The 2-Minute Summary
Until March 2020, companies paid a Dividend Distribution Tax (DDT) and dividends reached shareholders tax-free. That changed. From April 2020 onwards, dividends are taxable in the hands of shareholders. Companies now deduct TDS at 10% before paying any dividend. Under the Income Tax Act 2025, this provision is at Section 393(1) Sl. No. 7. The rate is 10%. There is no threshold limit, except one narrow exemption for individual shareholders receiving small dividends by non-cash mode.
Example: XYZ Ltd declares a dividend of Rs. 5 per share. Arun holds 3,000 shares. His dividend = Rs. 15,000. XYZ deducts TDS of 10% = Rs. 1,500 and pays Arun Rs. 13,500. Arun claims the Rs. 1,500 as TDS credit in his ITR. If his total tax on the dividend is Rs. 2,000 (at 20% slab), he pays only Rs. 500 extra at filing.
Under Income Tax Act 1961: Section 194 of the Income Tax Act 1961. Now Section 393(1) Sl. No. 7 under the 2025 Act. Rate unchanged at 10%.
At a Glance
| Item | Details |
| New Act Reference | Section 393(1), Sl. No. 7 of Income Tax Act 2025 |
| Old Act Reference | Section 194 of Income Tax Act 1961 |
| Who Deducts | The domestic company declaring the dividend |
| TDS Rate | 10% |
| Threshold | Nil (TDS on every dividend, with one exception below) |
| When to Deduct | Before making any distribution or payment of dividend |
| Form for TDS Certificate | Form 16A |
The Small Dividend Exception
Under Section 393(4) Table Sl. No. 10, TDS is NOT required if both of the following conditions are met:
- The dividend is paid by non-cash mode (not cash), AND
- The total dividend to that individual in the Tax Year does not exceed Rs. 10,000.
Both conditions must be satisfied simultaneously. If the dividend is paid in cash, TDS applies even if the amount is below Rs. 10,000. If the amount exceeds Rs. 10,000, TDS applies regardless of payment mode.
Example: Priya receives a dividend of Rs. 8,000 by direct bank transfer from MNO Ltd. Amount is below Rs. 10,000 and it is non-cash. No TDS is deducted. The same Rs. 8,000 paid as a dividend cheque crossed to cash would attract TDS since cash payment removes the exception.
Who is Exempt from Dividend TDS
The following entities receive dividends without TDS deduction under Section 393(4):
| Exempt Entity | Condition |
| LIC of India | On shares owned by LIC or in which it has full beneficial interest |
| GIC of India and four subsidiary companies | On their shareholdings |
| Any other insurer | On shares they own or hold beneficial interest in |
| Business trust (REIT/InvIT) | Where the company is a Special Purpose Vehicle under Schedule V |
| Any other notified person | As notified by the Central Government from time to time |
Example: LIC holds shares of Reliance Industries. Reliance declares a dividend. It does not deduct TDS before paying LIC since LIC is specifically exempt. The full dividend goes to LIC.
Dividend from Mutual Funds vs Dividend from Companies
TDS on dividends from companies (Sl. No. 7) and TDS on income from mutual fund units (Sl. No. 4(i)) are two separate provisions. Do not confuse them.
| Type | 2025 Act Reference | Rate | Threshold |
| Dividend from domestic company | Sl. No. 7 | 10% | Nil (Rs. 10,000 exception for non-cash small dividends) |
| Income from mutual fund units | Sl. No. 4(i) | 10% | Rs. 10,000 |
Capital gains from redeeming mutual fund units are NOT covered under either provision. TDS does not apply on mutual fund redemption capital gains at the source.
The 10% TDS on dividends is a withholding tax, not a final tax. Your actual tax on dividend income depends on your slab rate.
- If your slab is 10%: TDS of 10% is your final tax. No additional liability.
- If your slab is 20%: You pay an additional 10% at filing (TDS covered the first 10%).
- If your slab is 30%: You pay an additional 20% at filing.
- If your income is below the taxable threshold: File ITR and claim a full refund of the 10% TDS.
Practical Compliance Checklist
- If you are a company declaring dividend: Deduct TDS before payment. Do not release dividends without first depositing TDS with the government. Issue Form 16A to each shareholder.
- If you are a shareholder: Check Form 26AS or AIS after the dividend is paid. The TDS should reflect there. Claim it in your ITR under the relevant schedule.
- If your dividend income is small and you are a non-taxable individual: File an ITR and claim refund. The 10% TDS deducted can be refunded if your total income is below the basic exemption limit.
- If you hold shares through a broker in demat: The company’s registrar sends TDS data to NSDL/CDSL which flows to your Form 26AS. Verify before filing.
- If you are an insurer or REIT: Provide the necessary certificate or declaration to the company so TDS is not deducted on your dividend.
The shift from DDT to shareholder-level dividend taxation changed the equation significantly for investors in higher tax brackets. A 30% slab taxpayer now pays effectively 30% on dividends instead of the old 15% DDT. Understanding the TDS credit mechanism ensures you neither overpay at source nor miss a refund at filing.
