Indian Investors Adjust to New Dividend Tax Rules for FY2026-27

Dividend Income Tax Treatment

Dividend income in India is subject to taxation, with tax deducted at source (TDS) once payouts exceed a specific threshold. To mitigate this tax burden, investors may consider shifting towards growth-focused investments. These investments typically see returns taxed as capital gains only upon sale, according to Anita Basrur, Partner Direct Tax at Sudit K Parekh & Co LLP.

Basrur suggests opting for a “Growth Option” to allow returns to compound without immediate tax, with taxation occurring at Long-Term Capital Gains (LTCG) or Short-Term Capital Gains (STCG) rates upon divestment.

New Deduction Rules from FY2026-27

Significant changes take effect from financial year 2026–27. Under amended provisions, expenditures incurred to earn dividend or mutual fund income, taxed under ‘Income from Other Sources’, are no longer deductible. This means investors who borrow to acquire dividend-paying securities will not receive an interest deduction against that income. Basrur advises against borrowing for investment in dividend-paying securities solely for tax advantages.

Investor Reporting and Compliance

Investors must declare dividend income from shares and mutual funds in their income-tax returns, typically under the ‘Income from Other Sources’ category. It is crucial to reconcile received amounts with official statements from companies, brokers, or mutual funds, as well as the Annual Information Statement (AIS), Taxpayer Information Summary (TIS), and Form 26AS.

Where tax has been deducted at source, investors should claim the corresponding credit in their returns after verifying details match tax records, Basrur noted.

Capital Gains Preference Emerges

These tax adjustments encourage Indian investors to re-evaluate their asset allocation and investment horizons. The preference for growth-oriented investments, where gains are taxed only upon sale, becomes more pronounced.

This shift potentially alters capital flows within the Indian equity market, favouring companies with strong growth prospects over those primarily offering high dividends. Investors must align decisions with financial objectives and risk appetite, ensuring all tax planning remains within legal frameworks.