1. Introduction
Dividend income and capital gains form an important part of a taxpayer’s investment portfolio. While both are taxable, their tax treatment and compliance requirements vary. Dividend income attracts TDS, whereas capital gains for resident investors generally do not. Knowing these differences helps avoid mismatches in AIS, unnecessary notices, or additional interest liabilities.
This blog outlines the applicable provisions governing TDS on dividends and the taxation of capital gains, ensuring accuracy and practical understanding.
2. TDS on Dividend Income — Residents (Section 194)
Dividend paid by a company or mutual fund to a resident shareholder attracts TDS under Section 194.
2.1 Rate of Deduction
- 10% when PAN is furnished
- 20% if PAN not furnished (as per Section 206AA)
2.2 Situations Where No TDS is Required
- If total dividend paid during a financial year to Resident Individual is upto ₹10,000.
- Dividend paid to LIC, GIC & other specified insurers on shares owned by them
- Dividend credited to a business trust (REIT/InvIT) for specified investments
- Dividend covered by valid Form 15G / 15H to Resident Individual only
- Lower/Nil deduction based on certificate under Section 197
3. TDS on Dividend Payment to Non-Residents (Section 195 & Section 196D)
When dividends are paid to non-residents, the withholding mechanism is different from resident cases.
3.1 Section 195 – Non-Residents (Individuals / Foreign Companies)
Dividend paid to any non-resident (other than FPIs covered under 196D) attracts TDS:
- 20%
- Plus surcharge and health & education cess
3.2 Section 196D – Foreign Portfolio Investors (FPI/FII)
Dividend paid to FPIs/FIIs is subject to tax deduction:
- 20%, plus surcharge & cess
- No option for basic exemption against such income
- No indexation / no deductions allowed on such dividend income
3.3 Treaty (DTAA) Benefits
A non-resident can avail a lower TDS rate if the DTAA between India and their country prescribes a reduced rate.
To claim DTAA benefit, the following must be submitted to the company:
- Tax Residency Certificate (TRC)
- e-Form 10F filed on Income Tax Portal
- Declaration of Beneficial Ownership
- No PE in India declaration (where applicable)
- PAN if Available
If these documents are not provided → TDS must be deducted at 20% + surcharge + cess.
3.4 Special Case – Dividend on Certain GDRs
Dividend on Global Depository Receipts (GDRs) held in foreign currency may attract a 10% TDS under the applicable provisions (where conditions are satisfied).
3.5 Practical Position
The company must:
- Deduct tax before distributing dividend
- Deposit TDS within statutory timelines
- Issue Form 16A
- Report details in the quarterly TDS return
Non-residents may claim credit abroad under DTAA in their home country.
4. Taxation of Capital Gains (FY 2025-26)
Capital gains taxation applies based on asset type, holding period, and nature of gain.
4.1 Equity Shares / Equity-Oriented Mutual Funds / Business Trust Units
Short-Term Capital Gains (STCG) — Holding period ≤ 12 months
- Tax Rate: 20%
- No indexation
Long-Term Capital Gains (LTCG) — Holding period > 12 months
- Tax Rate: 12.5%
- Exemption up to ₹1,25,000 per financial year
- No indexation
- Applies to listed equity, equity-oriented mutual funds, and business trust units
4.2 Debt Mutual Funds & Other Non-Equity Assets
Short-Term Capital Gains
Taxed as per individual slab rates.
Long-Term Capital Gains (Section 112)
- 20% with indexation, for assets eligible for indexation
- Applicable to property, certain bonds, jewellery, unlisted shares, etc.
4.3 Capital Gains on Sale of Immovable Property
TDS on sale transaction (Section 194-IA)
- Buyer must deduct 1% TDS
- Applicable when sale consideration exceeds ₹50 lakh
Capital Gains
- STCG: Slab rates
- LTCG: 20% with indexation
- Deductions under Sections 54, 54F, 54EC, etc., may apply
4.4 Capital Gains for Non-Residents (Section 195)
For shares, property, or any capital asset sold by a non-resident:
- TDS is required on the entire sale consideration, unless a lower/nil TDS certificate under Section 197 is obtained.
- Applicable rate depends on whether gains are STCG/LTCG and asset type.
- DTAA relief may reduce the tax rate if supported by documents.
5. Practical Guidance for Investors & Deductors
- Ensure PAN/KYC details updated with companies, RTA, and brokers.
- Non-residents must submit TRC, Form 10F, beneficial ownership declaration in advance.
- Reconcile dividend and capital-gain entries with Form 26AS/AIS/TIS.
- Maintain purchase and sale invoices, contract notes, and holding statements for accurate tax computation.
- For property or non-resident sale transactions, ensure correct TDS compliance (particularly under Section 195).
6. Conclusion
Dividend income and capital gains follow entirely different tax mechanisms, both in terms of TDS and final tax liability.
- Dividend TDS is straightforward for residents under Section 194, while non-resident dividend taxation involves Sections 195 and 196D, along with DTAA documentation.
- Capital gains taxation depends greatly on asset type and holding period, with clear rates applicable for equity and non-equity assets in FY 2025-26.
With accurate documentation, correct classification and timely tax compliance, investors and professionals can ensure smooth, error-free tax handling throughout the financial year.
