If you earn dividends from company shares, your tax situation has changed quite a bit. The new income tax slab introduced for FY 2025-26 affects how dividend income is taxed — and most investors don’t fully understand what that means for them.
This piece breaks it down simply. No jargon. No complicated numbers. Just what you need to know.
Start Here: What Is Section 123?
Section 123 of the Companies Act, 2013, controls how companies declare and pay dividends to their shareholders. It sets the rules for where that dividend money can come from.
Under this section, a company can pay dividends only from:
- Profits earned in the current financial year after accounting for depreciation
- Accumulated profits from previous years, again after depreciation
- Money guaranteed by the central or state government
There’s also a clear list of what companies cannot use. Unrealised gains, notional profits, and profits from revaluation of assets, none of these can be used to declare dividends. If a company’s assets go up on paper but no actual money comes in, that gain stays on paper.
The Board of Directors can also declare an interim dividend during the year, usually based on profits up to the previous quarter.
So Section 123 is essentially a protection for shareholders. It makes sure that when a company says it’s paying a dividend, that money is real, not manufactured from accounting adjustments.
How Dividends Became Fully Taxable
This part is important. Until a few years ago, dividend income above ₹10 lakh was taxed in the hands of the investor. Below that, it wasn’t. There was also a Dividend Distribution Tax that companies paid before distributing dividends.
That system changed in 2020. Since then, dividend income is fully taxable for the investor, at whatever slab rate applies to them. The company pays nothing extra.
So every rupee of dividend income you receive now gets added to your total income for the year and taxed accordingly.
The New Income Tax Slabs for FY 2025-26
Here’s what the new income tax slab looks like for FY 2025-26 (AY 2026-27):
| Income Range | Tax Rate |
| ₹0 – ₹4 Lakh | Nil |
| ₹4,00,001 – ₹8 Lakh | 5% |
| ₹8,00,001 – ₹12 Lakh | 10% |
| ₹12,00,001 – ₹16 Lakh | 15% |
| ₹16,00,001 – ₹20 Lakh | 20% |
| ₹20,00,001 – ₹24 Lakh | 25% |
| Above ₹24 Lakh | 30% |
Dividend income gets added on top of your other income. If you earn ₹14 lakh from salary and ₹2 lakh as dividends, your total taxable income becomes ₹16 lakh. That extra ₹2 lakh gets taxed at the rate applicable to the ₹16 lakh slab, which is 20%.
For someone with a high salary, even a modest dividend income can end up being taxed at 25% or 30%. That’s quite different from what many investors expected when they first bought those shares.
What Deductions Are Actually Available Against Dividend Income?
Here’s where Section 123 meets the Income Tax Act. When dividend income is declared under Section 123 of the Companies Act, and you receive it as a shareholder, you can claim one specific deduction against it.
Under Section 57 of the Income Tax Act, you’re allowed to deduct interest paid on a loan taken to buy those shares, but only up to 20% of the dividend income you received. Nothing more.
That’s the only deduction available. No 80C. No standard deduction. No other expenses.
So if you received ₹1 lakh as dividend income and paid ₹30,000 in interest on a loan taken to buy those shares, you can only deduct ₹20,000 (20% of ₹1 lakh). The rest gets fully taxed at your applicable slab rate.
Under the new income tax slab regime, this becomes even more important to track. Because the slabs move quickly, a small jump in total income can push you into the next bracket.
What the New Slab Means for Dividend Investors
A few things shift when dividend income is taxed under the new slabs:
- Dividend income is added to your total income and taxed at your slab rate; there’s no separate flat rate for it
- The only deduction you can claim is interest expense up to 20% of the dividend under Section 57
- Investors above ₹20 lakh now pay 25% to 30% on every rupee of dividend
Companies also deduct 10% TDS on dividends above ₹5,000 in a year. That’s not your final tax, just an advance. You settle the actual amount when you file your return.
One thing many investors miss: interim dividends count too. Every payout, interim or final, gets added to your income in the year it’s received. Small dividends across multiple companies stack up quietly and can push you into a higher bracket.
There’s also no indexation benefit on dividends. Unlike capital gains, dividends don’t come with any inflation adjustment, what you earn is fully taxed at your slab rate. For investors already in the 25% or 30% bracket, this makes high-dividend stocks noticeably less attractive than they once were.
One Practical Consideration
If you hold shares across multiple companies and each pays a small dividend, the individual amounts may seem small. But when added together, they can push your total income into a higher bracket.
Tracking dividend income carefully before the year ends helps. If you know your income is close to a slab threshold, there may be decisions you can make — whether to take a payout or reinvest, that affect how much tax you owe.
Your accountant or tax advisor can help you with this before March 31st each year.
Putting It Together
Section 123 of the Companies Act makes sure dividends come from real profits. The new income tax slab then determines how much of that dividend stays with you after tax.
For investors who earn significant dividend income, understanding this connection isn’t optional. It directly affects the real return on your investment portfolio.
