Dividend Taxation in Director's Hands Post-2020: No DDT, Section 115BBDA 10% on ₹10L+

Since 1 April 2020, dividend is taxed in your hands at your slab rate, with the company withholding TDS under s.194 ITA 1961 at 10% on dividends above ₹5,000 a year. The old Dividend Distribution Tax (DDT) is gone, and the special 10% top-up tax under s.115BBDA ITA 1961 that once applied to dividends above ₹10 lakh was removed by the same Finance Act 2020 — so there is no extra tier, just your normal slab, and the TDS the company withheld is a credit against your final tax.

What the law actually requires

Before AY 2021-22. Dividend declared by an Indian company was subject to DDT under s.115-O ITA 1961, paid by the company at ~20.56% (including surcharge and cess). The shareholder received it tax-free under s.10(34) ITA 1961. On top, s.115BBDA taxed individuals, HUFs and firms at 10% (plus cess) on dividend income from domestic companies exceeding ₹10,00,000 in a year.

After Finance Act 2020 (w.e.f. 01-04-2020). Both layers were removed: DDT was abolished, the s.10(34) exemption was withdrawn, and s.115BBDA was omitted. The timeline:

The current position. Dividend received from a domestic company is "Income from Other Sources", added to total income, and taxed at your slab rate. It is not eligible for the salary standard deduction, and it is not subject to any additional flat tax — the "10% on ₹10 lakh+" framing that applied under s.115BBDA no longer exists.

TDS u/s 194. A domestic company deducting dividend paid to a resident individual must withhold TDS at 10% when the dividend in the financial year exceeds ₹5,000. Below ₹5,000, no TDS. The TDS is not a final tax — it is a credit adjustable against your slab-rate liability (Form 26AS / AIS).

Worked example: ₹20 lakh dividend to a director

Anita, a director-shareholder of Kavach Industries Pvt Ltd, receives ₹20,00,000 as dividend in FY 2025-26 (AY 2026-27). She has no other income. The company:

• Deducts TDS u/s 194 at 10% = ₹2,00,000 and deposits it.
• Pays Anita the balance, ₹18,00,000, via bank transfer.

Her final tax, new regime, FY 2025-26 (AY 2026-27) slabs:

The TDS of ₹2 lakh already paid by the company covers almost all of her liability; she owes ₹8,000 at filing. If her slab rate were higher (because of other income pushing her above ₹20 lakh), the balance payable would grow, and if her total income were ₹12 lakh or less, the s.87A rebate (FY 2025-26: up to ₹12,00,000 taxable income) would wipe out the tax entirely.

Practical implications

• The company's cash flow is unchanged by DDT removal, but yours is not. The company no longer pays ~20.56% DDT, so it can distribute more — but you now pay slab-rate tax, and the company withholds 10% from the cheque.
• The ₹10 lakh "special rate" is gone. A director who remembers "10% above ₹10 lakh" and plans around it will under-provide at filing if her slab is 30%. The 10% that s.194 withholds is only a credit, not the final rate.
• Non-PAN penalty. If the shareholder has not linked PAN, s.206AA forces TDS at 20% instead of 10%, with no threshold relief.
• Dividend does not earn the salary deductions. No standard deduction, no 80C against dividend. It sits at the top of your income.
• Where dividend beats salary. If your total income, including dividend, lands within the FY 2025-26 s.87A rebate window (₹12 lakh), dividend can be effectively tax-free — worth modelling before assuming salary is always better.

Changed FY 2025-26: Finance Act 2025 raised the s.87A rebate so taxable income up to ₹12,00,000 (new regime) is tax-free. This is the first year a moderate dividend stream can be fully sheltered — but the moment any other income pushes you past ₹12 lakh, the whole dividend is taxed at slab rates.

Step-by-step: what to do

• Confirm the company is compliant first: dividend declared only out of current-year profit or free reserves (s.123 CA 2013), by board resolution, TDS u/s 194 deposited within 14 days.
• Reconcile the TDS against Form 26AS before filing your ITR; the s.194 credit must appear or you will pay the full tax and then chase a refund.
• Compute your slab including the dividend and any other income; use the salary vs dividend optimiser to decide whether dividend or salary is cheaper in your year.
• If dividend is small (total income ≤ ₹12 lakh), the s.87A rebate may make it tax-free — do not overpay by ignoring the rebate.
• Maintain the board resolution and TDS challans — a dividend with no resolution is open to recharacterisation, and the TDS trail is your proof of classification.

FAQ

Is dividend still tax-free?
No. DDT abolition (Finance Act 2020, w.e.f. 01-04-2020) ended the s.10(34) exemption. Dividends are taxable at your slab rate from AY 2021-22 onwards.

What happened to Section 115BBDA?
It was omitted by Finance Act 2020. The 10% tax on dividend above ₹10 lakh for individuals/HUFs/firms applied only up to AY 2020-21; there is no such top-up today.

Who deducts TDS on my dividend?
The company paying it, under s.194 ITA 1961, at 10%, when dividend to a resident individual exceeds ₹5,000 in the financial year. The withheld amount is a credit, not a final tax.

I received ₹20 lakh dividend and the company deducted ₹2 lakh TDS. Do I owe more?
If dividend is your only income, your tax is about ₹2.08 lakh (FY 2025-26 new regime) and you owe roughly ₹8,000 at filing. With other income, the balance can be much higher.

Can dividend be tax-free in FY 2025-26?
Yes, up to a point: under the new regime, taxable income up to ₹12 lakh is fully rebated by s.87A. A director whose total income stays within that window can take dividend tax-free.

Sources

• Income Tax Act 1961, s.2(22), s.10(34) (exemption withdrawn w.e.f. AY 2021-22), s.115-O (DDT abolished), s.115BBDA (omitted), s.194 (TDS on dividend), s.87A (rebate), s.206AA (non-PAN rate)
• Finance Act 2020 — DDT abolition and s.115BBDA omission w.e.f. 01-04-2020
• Finance Act 2025 — new-regime slabs and ₹12 lakh rebate for AY 2026-27
• Companies Act 2013, s.123 — dividend payable out of profits

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