A dividend is a part of a company's profit that its board decides to pay out to shareholders, usually in cash and in proportion to the shares each investor holds. It is declared per share, so a larger holding gives a larger payout. The company is never obliged to pay it.
For an investor trying to understand what is dividend, the basic idea is that the payout is fixed per share, so the number of shares held decides the amount received.
The Income Tax Act uses the word in a wider sense than declared payouts. It includes "deemed dividend" under Section 2(40) of the Income-tax Act, 2025 (earlier Section 2(22) of the 1961 Act), which means certain receipts that are treated as a dividend for tax purposes.
How dividends are taxed in India
Earlier, the company paid dividend distribution tax (DDT) and the dividend was exempt for shareholders under Section 10(34). The Finance Act 2020 abolished the DDT, so investors now pay tax at their own slab rate under Income from Other Sources.
Under Section 194 of the old Act, now covered by Section 393 of the Income-tax Act, 2025, the company deducts tax at source (TDS) of 10% if the shareholder has given a permanent account number (PAN), and 20% if not. The deduction applies when dividends from one company exceed Rs 10,000 in a financial year, from FY 2025-26.
For an individual holding 100 shares, a payout of Rs 500 in a year will be below this limit, so no TDS will be deducted.
TDS is a credit against the final tax, so the gross dividend must be declared in the income tax return (ITR). Non resident Indians (NRIs) fall under Section 195. The Income-tax Act, 2025, in force from 1 April 2026, gives these provisions new section numbers.
Why it matters, and dividend vs IDCW
A share gives returns through price change and through payouts and the payouts are taxable income.
Dividend yield is gross dividend divided by index market capitalisation, times 100, over the preceding 12 months. A regulated electronic marketplace in Mumbai where buyers and sellers trade shares and other securities at publicly visible prices. Read the full meaning of NSE (National Stock Exchange) publishes the dividend yield of its indices every trading day.
SEBI is the statutory regulator of India's securities market, with the legal duty to protect investors and to promote and regulate that market. Read the full meaning of SEBI has mandated that the dividend option in mutual funds be called income distribution cum capital withdrawal (IDCW). TDS on IDCW falls under Section 194K, not Section 194, at same rate for resident investors with PAN. The tax treatment for individuals did not change.