Dividend Income Tax in Tax Year 2026-27: What Changed
- How dividends are taxed
- The deduction change
- Worked example 1: borrowing to invest
- TDS on dividends
- Worked example 2: a retiree on the new regime
- High earners: the 15% surcharge cap
- Advance tax on dividends
- Year labels
- Where this fits
For tax year 2026-27, dividends received by a resident individual are taxed as income from other sources at slab rates. From 1 April 2026 no deduction at all is allowed against them, not even interest on money borrowed to buy the shares. The Finance Act, 2026 removed the earlier allowance of interest up to 20% of the dividend. The same no-deduction rule applies to income distributions from mutual funds.
Companies deduct 10% TDS on dividends, except on up to ₹10,000 a year paid to an individual other than in cash. Surcharge on tax attributable to dividends is capped at 15%. A share buyback is no longer a dividend.
How dividends are taxed
- Head of income. Section 92(2)(a) of the Income-tax Act, 2025 makes any dividend chargeable under “Income from other sources”.
- Rate. For a resident individual there is no special rate. Dividends are added to total income and taxed at slab rates, so the section 156 rebate can apply under the new regime if total income is within ₹12 lakh.
- What counts as a dividend. Section 2(40) defines it to include distributions of accumulated profits, distributions on liquidation or capital reduction, and certain loans by closely held companies to substantial shareholders (clause (e)).
- Buybacks are out. Clause (f), payments on a buyback, was omitted by section 35 of the Finance Act, 2026. Buybacks from 1 April 2026 are taxed as capital gains; see buyback tax after Finance Act 2026.
The deduction change
| Provision | Income-tax Act, 2025 as passed | After section 44 of the Finance Act, 2026 |
|---|---|---|
| Section 93(1)(a): commission paid to a banker or agent to realise the income | Allowed for dividends and interest on securities | Allowed only for interest on securities |
| Section 93(2): dividends and mutual fund income | Interest expense allowed, up to 20% of the income; no deduction for buyback dividends | No deduction allowed against any dividend income or mutual fund unit income |
Section 1(2)(a) of the Finance Act brings the change into force on 1 April 2026, so it applies from tax year 2026-27.
Worked example 1: borrowing to invest
Ramesh is on the old regime and pays tax at 30%. He receives ₹3,00,000 of dividends in tax year 2026-27. He pays ₹1,00,000 of interest on a loan taken to buy the shares.
| Under section 93(2) as passed | After the Finance Act, 2026 | |
|---|---|---|
| Dividends | ₹3,00,000 | ₹3,00,000 |
| Interest deduction | ₹60,000 (20% cap) | Nil |
| Taxable dividend income | ₹2,40,000 | ₹3,00,000 |
| Tax at 30% plus 4% cess | ₹74,880 | ₹93,600 |
The extra ₹18,720 is the cost of losing the deduction. The interest paid remains a cash cost with no tax relief against dividends.
TDS on dividends
- Rate and threshold. A domestic company deducts 10% on dividends before distribution (section 393(1), Table Sl. No. 7). The table’s threshold is nil.
- The ₹10,000 exception. Section 393(4), Table Sl. No. 10(f), excludes dividends paid to an individual shareholder other than in cash, where the year’s dividends from that company do not exceed ₹10,000.
- Mutual fund distributions. Income from mutual fund units is subject to 10% TDS above ₹10,000 (Sl. No. 4(i)).
- No PAN. TDS is at least 20% (section 397(2)).
- Nil-tax declaration. A resident individual whose tax will be nil can give Form No. 121 to the company or registrar. From 1 April 2027, the declaration can also be given electronically to the depository for listed shares held in demat form (section 393(6)(b), inserted by the Finance Act, 2026). See Form 121 declaration.
Worked example 2: a retiree on the new regime
Lata, 64, has pension of ₹7,00,000 and receives ₹1,20,000 of dividends from one company in tax year 2026-27.
- Total income is ₹7,45,000: pension less ₹75,000 standard deduction, plus dividends.
- Slab tax is ₹17,250, fully covered by the section 156 rebate, so her tax is nil.
- Without a declaration the company deducts 10%, ₹12,000, which she would recover only through her return.
- Filing Form No. 121 at the start of the year avoids the deduction. Being over 60, she needs only to meet the nil-tax test.
High earners: the 15% surcharge cap
Under section 3(4) of the Finance Act, 2026, surcharge on the part of income tax that relates to dividend income cannot exceed 15%, under either regime. Under the new regime, if total income exceeds ₹2 crore only because of dividends and specified capital gains, the surcharge is 15% rather than 25%. See surcharge and marginal relief, or test your own mix of slab income and dividends with the surcharge and marginal relief calculator.
Advance tax on dividends
Dividends are often unpredictable. Section 425(4) waives interest for deferment of advance tax where a shortfall arises from underestimating dividend income, provided the tax on it is paid in the remaining instalments or by 31 March. The waiver does not extend to deemed dividends on loans under section 2(40)(e) (section 425(6)). See advance tax for tax year 2026-27.
Year labels
This page covers dividends received on or after 1 April 2026 under the Income-tax Act, 2025, as amended. Dividends in FY 2025-26 belong to AY 2026-27 under the Income-tax Act, 1961, where the interest deduction was governed by section 57.
Where this fits
- Yield on your holdings: dividend yield calculator
- Dividends or growth: dividend yield vs total return
- Selling the shares instead: tax on equity shares and equity funds
- TDS on other income: TDS rates and thresholds for 2026-27
Sources. Finance Act, 2026, sections 1(2)(a), 3(4), 35, 44 and 84, Gazette of India, 30 March 2026. Income-tax Act, 2025, sections 2(40), 92, 93, 156, 393, 397 and 425, Gazette of India, 21 August 2025.