How can I reduce taxes on dividends from stock investments?

You can reduce taxes on dividends from stock investments in India by investing through tax-exempt accounts like PPF or NPS, holding dividend-paying stocks in a Hindu Undivided Family (HUF) account, choosing growth options in mutual funds, or investing in tax-free bonds.

Let’s explore the best strategies to legally minimize taxes on your dividend income.

1. Invest Through Tax-Free Accounts

Certain accounts offer tax exemptions on investments and returns, helping you legally avoid taxes on dividend income.

• PPF (Public Provident Fund): Earnings and withdrawals are tax-free.
• NPS (National Pension System): Tax benefits under Section 80C and 10(12A).
• EPF (Employee Provident Fund): Dividend income reinvested in EPF is tax-free.

By investing through these accounts, you can enjoy tax-free returns on your investments.

2. Choose Growth Option Instead of Dividend Option in Mutual Funds

Dividend income from mutual funds is taxable, but capital gains from the growth option can have lower tax rates.

• Dividend option: Taxable as per your income slab.
• Growth option: Taxed only when you sell the units.
• Long-term capital gains (LTCG): 10% tax if gains exceed ₹1 lakh.

Opting for the growth option reduces your immediate tax burden.

3. Use the Hindu Undivided Family (HUF) Account

If you have a family business, opening an HUF account can help reduce tax liability on dividend income.

• Separate tax entity: HUF has its own tax exemption limits.
• Tax benefits: Dividends received in the HUF account are taxed separately.
• Income splitting: Helps distribute income among family members.

Using an HUF account legally reduces overall tax liability.

4. Invest in Tax-Free Bonds

Tax-free bonds provide a steady income without attracting tax liability.

• Issued by government-backed institutions: Safe and secure.
• No tax on interest income: Unlike fixed deposits.
• Long-term investment: Typically, 10 to 20 years.

Adding tax-free bonds to your portfolio reduces your taxable income.