By Manu Rao | Updated March 2026
What Is Dividend Tax?
Dividend tax is the tax imposed on distributions of profit from an Indian company to its shareholders. Until March 31, 2020, companies paid Dividend Distribution Tax (DDT) at approximately 20.56% before distributing dividends — shareholders received tax-free dividends. The Finance Act 2020 abolished DDT and shifted taxation to the shareholder's hands. Now, dividends are taxed at the shareholder's applicable income tax rate, and the company deducts TDS before payment.
For foreign investors receiving dividends from Indian companies, this change has significant implications. The withholding rate, DTAA applicability, and repatriation mechanics all changed.
Legal Framework
- Section 115-O — DDT provision (abolished from April 1, 2020, but relevant for older dividend distributions)
- Section 56(2)(i) — Dividends are taxable as "Income from Other Sources" in the hands of shareholders
- Section 194 — TDS on dividends paid to resident shareholders (10% if exceeding INR 5,000 per year)
- Section 195 — TDS on dividends paid to non-resident shareholders (20% or DTAA rate)
- Section 115A — Tax rate for non-residents receiving dividends (20%)
- Section 90/91 — Relief under DTAA or unilateral relief for double taxation
Current Dividend Tax Structure
| Shareholder Type | Tax Rate on Dividends | TDS Rate |
|---|---|---|
| Indian resident individual | Slab rate (up to 30% + surcharge + cess) | 10% (Section 194) if dividend exceeds INR 5,000/year |
| Indian resident company | Corporate tax rate (22%/25%/30%) | 10% (Section 194) |
| Non-resident individual (foreigner/NRI) | 20% + surcharge + cess (or DTAA rate, whichever is lower) | 20% (Section 195) or DTAA rate |
| Foreign company | 20% + surcharge + cess (or DTAA rate) | 20% (Section 195) or DTAA rate |
| Foreign Portfolio Investor (FPI) | 20% (Section 115AD) | 20% |
DTAA Rates on Dividends
Many DTAAs provide lower withholding rates on dividends than the 20% domestic rate. Here are the treaty rates for common investment source countries:
| Country | DTAA Rate on Dividends | Conditions |
|---|---|---|
| USA | 15% (general) / 25% (if paid from REIT) | Must provide TRC and Form 10F |
| UK | 15% (general) / 10% (if recipient owns 10%+ of voting power) | Subject to Limitation of Benefits clause |
| Singapore | 15% (general) / 10% (if recipient owns 25%+ of capital) | TRC required |
| Netherlands | 10% | Subject to Principal Purpose Test post-MLI |
| Germany | 10% | TRC required |
| Japan | 10% | TRC required |
| UAE | 10% | TRC from UAE tax authority required |
| Mauritius | 5% (if beneficial owner holds 10%+ capital) / 15% otherwise | Subject to LOB and PPT |
To claim a DTAA rate lower than 20%, the foreign shareholder must provide a Tax Residency Certificate from their home country and a self-declaration in Form 10F.
How Dividend Tax Affects Foreign-Owned Indian Companies
- Double taxation risk — The Indian company pays corporate tax on its profits. When it distributes the remaining profit as dividends, the foreign shareholder pays dividend tax. This creates two layers of taxation on the same earnings. The DTAA credit mechanism in the shareholder's home country is the only relief.
- Withholding creates cash flow impact — A 20% (or DTAA rate) withholding on dividends means the foreign parent receives less cash. In a 100% subsidiary, this reduces the cash available for the parent's operations abroad.
- Section 80M deduction for holding structures — If an Indian holding company receives dividends from an Indian subsidiary and distributes them further, Section 80M allows a deduction for the inter-corporate dividend received, preventing triple taxation.
- No DDT means higher effective distribution — Under the old DDT regime, the company paid approximately 20.56% DDT on top of dividends. For foreign shareholders entitled to a 10% DTAA rate, the new system is cheaper: only 10% withholding instead of 20.56% DDT.
Process for Paying Dividends to Foreign Shareholders
- Board resolution — The board recommends the dividend (interim) or shareholders approve it at the AGM (final dividend).
- Check distributable profits — Dividends can only be paid from current year profits, accumulated profits, or money provided by the central/state government. Section 123 of the Companies Act 2013 governs this.
- Collect TRC from foreign shareholder — Without a TRC, the company must withhold at 20%. With a valid TRC and Form 10F, the lower DTAA rate applies.
- Deduct TDS — Withhold at 20% or the DTAA rate on the gross dividend amount.
- Deposit TDS — Within 7 days of the end of the month in which the deduction was made.
- File Form 15CA/15CB — Before remitting the net dividend to the foreign shareholder's overseas bank account.
- Issue Form 16A — TDS certificate to the foreign shareholder.
- Report in Form 27Q — Quarterly TDS return for payments to non-residents.
Penalties
- Non-deduction of TDS on dividend — The company is treated as "assessee in default" under Section 201. It must pay the TDS amount plus interest at 1% per month (if not deducted) or 1.5% per month (if deducted but not deposited).
- Expense disallowance — Not applicable for dividends specifically, but non-deduction of TDS on any payment to non-residents triggers Section 40(a)(i) disallowance of the expense.
- Late filing of Form 27Q — INR 200/day late fee under Section 234E.
Common Mistakes
- Withholding at 20% when a lower DTAA rate is available — The company is the deductor and has the responsibility to apply the correct rate. If the foreign shareholder provides a TRC but the company still withholds at 20%, the shareholder must file an Indian tax return and claim a refund — a process that takes 12-18 months.
- Not filing Form 15CA/15CB for dividend remittance — Banks in India will not process the foreign remittance without Form 15CA (filed online) and Form 15CB (CA certificate). Some companies forget this step and face delays in repatriating dividends.
- Declaring dividends without sufficient distributable profits — Section 123 of Companies Act prohibits paying dividends out of capital. Companies that accumulated losses cannot declare dividends even if they had profits in the current year, unless the current year profits exceed the accumulated losses.
- Not considering the surcharge on non-resident withholding — The 20% rate is the base rate. Surcharge and cess apply on top, making the effective rate approximately 20.8% to 21.84% depending on the dividend amount.
- Ignoring the Multilateral Instrument (MLI) impact on DTAA rates — India signed the BEPS MLI, which modifies many DTAAs. The Principal Purpose Test (PPT) can deny treaty benefits if the arrangement's main purpose is to obtain the reduced rate. Treaty shopping through shell companies in Singapore or Mauritius is riskier now.
Practical Example
A Japanese company holds 100% of an Indian subsidiary in Pune. The subsidiary earned INR 2 crores in profit after corporate tax. The board recommends a dividend of INR 1 crore. The Japanese parent provides a TRC issued by the Japanese National Tax Agency. Under the India-Japan DTAA, the dividend withholding rate is 10%. The Indian company deducts TDS of INR 10 lakhs (10% of INR 1 crore) and deposits it with the government by the 7th of the following month. The company files Form 15CA/15CB and remits INR 90 lakhs to the Japanese parent's bank account. The Japanese parent claims credit for INR 10 lakhs of Indian tax against its Japanese corporate tax liability under the DTAA. Form 27Q is filed for the quarter reporting this payment.
Related Terms
- Corporate Tax — Paid before dividends are distributed
- Withholding Tax — The mechanism for collecting dividend tax
- Tax Residency Certificate — Required for claiming DTAA rates
- Form 15CA/15CB — Required before remitting dividends abroad
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