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# Is Dividend on Unlisted Shares Taxable?
For years, dividends in India were tax-free in the investor's hands because the company paid Dividend Distribution Tax (DDT) before distributing them. That regime ended. Since FY 2020-21, dividends — including those on unlisted shares — are fully taxable in the shareholder's hands, and the company deducts TDS before paying you.
This article explains the current treatment, the TDS rules, the limited deduction available, and how to report dividend income in your ITR.
Disclaimer: This is educational content, not tax advice. Dividend taxation interacts with your overall income and slab. Consult a chartered accountant for your specific situation.
The Big Change: DDT Abolished From FY 2020-21
The Finance Act 2020 abolished the Dividend Distribution Tax with effect from 1 April 2020 (FY 2020-21). The corresponding exemption for shareholders under Section 10(34) was withdrawn.
The consequence is a shift in who bears the tax:
- Before FY 2020-21: the company paid DDT (~20% effective); dividends were tax-free for the investor.
- From FY 2020-21: the company pays no DDT; the investor pays tax on the dividend at their slab rate.
This applies equally to unlisted company dividends.
How Dividends Are Taxed Now
Dividends are taxable as "Income from Other Sources" and added to your total income. They are then taxed at your applicable slab rate:
- A 30%-bracket investor effectively pays 30% + surcharge + 4% cess on the dividend.
- A 5%-bracket investor pays only 5% plus cess.
Because the rate depends on your slab, dividends are more expensive for high earners than the old flat DDT regime — a meaningful planning point for founders and large shareholders of unlisted companies.
TDS Under Section 194
When an Indian company pays a dividend to a resident shareholder, Section 194 requires it to deduct TDS:
- Rate: 10% of the dividend.
- Threshold: TDS applies only if the aggregate dividend to that shareholder in the financial year exceeds ₹5,000.
- No PAN: if you have not furnished a valid PAN, TDS is deducted at 20%.
The deducted TDS shows up in your Form 26AS and AIS, and you claim credit for it against your final tax liability when filing your ITR.
Because TDS is only 10% but your slab rate may be higher, the TDS often does not cover your full liability. The shortfall must be paid as advance tax or self-assessment tax.
### Worked Example
- You hold unlisted shares and receive a dividend of ₹40,000 in the year.
- The company deducts TDS at 10% = ₹4,000. You receive ₹36,000.
- You are in the 30% bracket, so your tax on the dividend is roughly ₹40,000 × 30% = ₹12,000 (plus cess).
- You claim the ₹4,000 TDS credit and pay the balance ₹8,000+ through advance/self-assessment tax.
The One Deduction You Get: Interest, Capped at 20%
You generally cannot deduct expenses against dividend income, with one exception:
- Interest expense incurred to earn the dividend (e.g., interest on a loan taken to buy the shares) is deductible.
- The deduction is capped at 20% of the dividend income.
No other costs — demat charges, advisory fees, administrative expenses — are deductible.
Advance Tax on Dividends
Because TDS at 10% rarely matches a higher slab liability, dividend income can create an advance tax obligation. If your total estimated tax for the year (after TDS) exceeds ₹10,000, you must pay advance tax in instalments, or face interest under Sections 234B and 234C.
A useful relief: interest under Section 234C is not charged for shortfalls arising from dividend income that you could not have anticipated, provided you pay the tax in the remaining instalments after the dividend is received.
Reporting in Your ITR
- Report the gross dividend (before TDS) under Income from Other Sources.
- Claim the Section 194 TDS as a credit.
- Use ITR-2 or ITR-3 if you also have capital gains from the shares.
- Cross-check the dividend figure against your AIS — companies report dividends paid, and mismatches trigger notices.
Quick Reference
- Dividends taxable in your hands at slab rate since FY 2020-21.
- TDS 10% under Section 194 above ₹5,000 (20% without PAN).
- Only deduction: interest, capped at 20% of the dividend.
- Report gross dividend; claim TDS credit; watch advance tax.
*Published by the Polemarch editorial team. Not tax advice — consult a chartered accountant.*