Dividend Income: Old Income Tax Act Vs The New Income Tax Act, 2025

Dividend taxation went through its biggest shake-up in decades back in 2020, when the Dividend Distribution Tax was scrapped and the burden shifted from companies to shareholders. That change still defines how dividends are taxed today, and it continues unchanged under the Income-tax Act, 2025, effective from 1st April 2026. What's actually new is where the relevant provisions sit, along with a couple of recent threshold revisions worth knowing before you file.

The 2020 Shift Still Governs Everything

Before April 2020, companies paid Dividend Distribution Tax on distributed profits, and the dividend itself was largely tax-free in the shareholder's hands. That system is gone, and the new Act doesn't revive it. Dividend income is fully taxable in the shareholder's hands at applicable slab rates, whether it comes from a domestic company, a mutual fund, or in most cases a foreign company. This holds true whether an individual is under the old or new personal tax regime — dividend taxation at slab rates isn't something either regime changes, unlike deductions such as the interest income benefits under Section 153.

Where Dividend Income Is Taxed

For most individual investors, dividend income falls under "Income from Other Sources," now governed by Section 92 of the new Act, replacing the old Section 56. If dividend income arises from shares held as stock-in-trade by a trader or dealer in securities, it's taxed as business income under Section 26 instead, following business computation rules rather than the other-sources framework — the same distinction that has always applied to interest income under this head.

What "Dividend" Actually Includes

The definition of dividend has always been broader than the straightforward cash payout most people picture. The old Section 2(22) defined several categories treated as dividend for tax purposes  actual cash or asset distribution out of accumulated profits, issue of debentures or bonus shares to preference shareholders from accumulated profits, distribution on liquidation, distribution on reduction of share capital, and critically, loans or advances by a closely-held company to a shareholder holding a substantial interest. This framework carries forward in substance under the new Act, with the same categories continuing to be treated as dividend.

Deemed Dividend: The Trap for Closely-Held Companies

The deemed dividend provision, historically under Section 2(22)(e), deserves particular attention because it catches people who don't think of themselves as receiving a dividend at all. If a closely-held company  one where the public isn't substantially interested  gives a loan or advance to a shareholder holding at least 10 Percentage of shares and voting rights, and the company has accumulated profits, that loan is treated as deemed dividend to the extent of those profits. This applies even though no dividend was formally declared and the shareholder may fully intend to repay the amount.

Practical example: A director holding 25 Percentage of a closely-held manufacturing company takes a Rs15 lakh personal loan from the company for a home renovation. The company has Rs20 lakh in accumulated profits. Regardless of loan documentation or repayment intention, Rs15 lakh is treated as deemed dividend in the director's hands, since it falls entirely within available accumulated profits.

Genuine trade advances made in the ordinary course of business generally fall outside this provision  the deemed dividend rule targets loans functioning as disguised profit distribution, not routine commercial transactions.

TDS on Dividend Payments

Tax deduction at source on dividends, historically under Section 194 for resident shareholders and Section 195 for non-residents, now falls within the consolidated TDS chapter under Section 393 of the new Act, which absorbs all TDS provisions previously spread across Sections 192 to 196D. The mechanics remain the same: a domestic company deducts TDS at 10 Percentage on dividends paid to resident shareholders, rising to 20 Percentage if the shareholder's PAN isn't available or isn't linked to Aadhaar.

The threshold below which no TDS applies was recently revised, from Rs5,000 per shareholder per year to Rs10,000 through a recent Budget amendment, a change that continues under the new Act's Section 393 framework. Certain categories remain exempt from TDS altogether, including LIC, GIC, other insurers holding shares with full beneficial interest, and business trusts receiving dividends from their special purpose vehicles.

For non-resident shareholders, TDS applies at a flat 20 Percentage plus applicable surcharge and cess, subject to a lower rate under an applicable Double Taxation Avoidance Agreement where relevant.

The Limited Deduction Against Dividend Income

A common misconception is that expenses related to earning dividend income demat account charges, advisory fees, portfolio management costs can be freely claimed as a deduction. They can't, mostly. The only deduction permitted is interest expense on money borrowed specifically to invest in the shares generating the dividend, capped at 20 Percentage of the dividend income received. No deduction is allowed for commission or salary paid to someone managing the investment, regardless of how directly connected that expense might feel.

Practical example: An investor earns Rs5 lakh in dividend income and pays Rs1.5 lakh in interest on a loan taken to purchase the underlying shares. The deduction is capped at 20 Percentage of Rs5 lakh, so only Rs1 lakh of that interest is deductible, with the remaining Rs50,000 simply lost.

Common Mistakes People Make

The most frequent error is assuming a personal loan from a closely-held company where one holds a substantial stake carries no tax consequence, overlooking the deemed dividend trap entirely. Another common mistake is claiming demat charges, brokerage, or advisory fees against dividend income, none of which qualify under the narrow interest-only deduction rule. People also frequently miss that dividend TDS below the revised Rs10,000 threshold doesn't mean the income itself is tax-free — it only means TDS wasn't deducted at source.

Compliance Tips

Track loans or advances taken from any closely-held company where you hold a substantial stake, and evaluate deemed dividend exposure before assuming a loan is simply a loan. Reconcile dividend income against Form 26AS and the Annual Information Statement each year, since TDS-deducted amounts and actual receipts should align. And if you've borrowed to invest in dividend-paying shares, keep clean documentation of the loan's purpose, since only interest tied to that specific investment qualifies for the capped deduction.

Frequently Asked Questions

Is dividend income still taxable in the shareholder's hands under the new Act? Yes, unchanged since the 2020 abolition of Dividend Distribution Tax, at applicable slab rates.

Which section now governs TDS on dividend payments? Section 393 of the new Act, the consolidated TDS chapter, replacing the old Sections 194 and 195.

What is the revised TDS threshold for dividend payments? Rs10,000 per shareholder per year, raised from the earlier Rs5,000 through a recent Budget amendment.

Can a shareholder claim deductions for demat or advisory charges against dividend income? No. Only interest on borrowed funds used to invest in the shares is deductible, capped at 20 Percentage of dividend income.

Does a loan from a closely-held company to a substantial shareholder attract tax? Yes, it can be treated as deemed dividend to the extent of the company's accumulated profits.

Final Word

Dividend taxation hasn't changed in substance under the new Act, but the deemed dividend trap and the narrow deduction rule continue to catch people who assume dividends are simple. Track loans from closely-held companies carefully, and don't overreach on deductions beyond the interest-only allowance.