How are stock dividends taxed in India?

Stock dividends in India are taxed as per the investor’s income tax slab. Since April 1, 2020, dividend income is no longer tax-free. Instead, companies deduct a 10% TDS (Tax Deducted at Source) on dividends exceeding ₹5,000 in a financial year. Investors must report this income and pay tax according to their applicable income tax slab.

1. How Are Stock Dividends Taxed in India?

In India, dividends are taxed as part of the investor’s total income. The taxation rules are as follows:

• Tax at Slab Rate: Dividends are added to the investor’s taxable income and taxed based on their income tax slab.
• 10% TDS Deduction: If the total dividend income from a company exceeds ₹5,000 in a financial year, a 10% TDS is deducted.
• Surcharge & Cess: High-income earners may also need to pay a surcharge and 4% health & education cess on the tax amount.

2. TDS on Dividend Income

The company paying the dividend deducts TDS before crediting the amount to the investor’s account:

• Resident Investors: TDS is deducted at 10% if the total dividend exceeds ₹5,000 in a year.
• Non-Resident Investors: TDS is deducted at 20% as per Section 195 of the Income Tax Act.
• Form 15G/15H Submission: Investors with total income below the taxable limit can submit Form 15G/15H to avoid TDS deduction.

3. How to Reduce Tax on Dividend Income?

Investors can legally reduce their tax liability on dividend income using these strategies:

• Invest in Tax-Saving Instruments: Using tax-free bonds or ELSS funds can lower overall tax liability.
• Use Family Members’ Accounts: Spreading investments among family members in lower tax brackets can help reduce taxes.
• Submit Form 15G/15H: If your income is below the taxable limit, submit these forms to avoid TDS.
• Opt for Growth Option in Mutual Funds: Instead of dividend payouts, choose the growth option to defer tax liability.

4. Conclusion

Stock dividends in India are taxed based on the investor's income tax slab, with a 10% TDS applicable on amounts exceeding ₹5,000 per year. Understanding how dividends are taxed and using smart strategies can help investors minimize their tax burden and maximize returns.