Quick answer: Dividends are a portion of a company’s profits distributed to shareholders—most often as cash directly credited to your bank account. In India, eligibility hinges on the record/ex-dividend date, payment must follow strict Companies Act timelines, and dividends are taxed in the investor’s hands with TDS rules that changed from 1 April 2025. (CAIRR, Zerodha, Cipla)
What is a Dividend?
A dividend is the cash a company pays shareholders from distributable profits (or specified reserves) after meeting legal conditions. Final dividends are approved at the AGM; interim dividends can be declared by the board during the year. Under Section 123 of the Companies Act, companies must use profits/free reserves and meet set-off requirements; money declared as dividend must be parked in a separate bank account within five days. (CAIRR)
Types of Dividends You’ll See in India
- Final dividend: Declared at the AGM for the full year.
- Interim dividend: Declared mid-year by the board (with restrictions if the current year is loss-making). (CAIRR)
- Special dividend: One-off, typically on cash-rich events (asset sale, extraordinary profits).
- Bonus shares vs “stock dividend”: In India, companies issue bonus shares (capitalization of reserves); this is not the same as a cash dividend.
The Four Key Dates (and what you must do)
| Stage | What it means | What you should do |
|---|---|---|
| Declaration date | Board/AGM approves dividend | Ensure your bank/KYC are updated with your DP/RTA |
| Record date | Company checks who is on its register | You must be a shareholder on this date |
| Ex-dividend date | Shares trade without dividend benefit | Under T+1, ex-date typically coincides with record date; you must buy before this date |
| Payment date | Dividend credited to your bank | Watch for NEFT/IMPS credit (electronic transfer mandated) |
Under India’s T+1 settlement, brokers/exchanges commonly set the ex-date the same day as the record date; to be eligible you must own the shares before that date. (Zerodha, Zerodha Support)
How Are Dividends Actually Paid?
- Mode of payment: Listed companies must use an electronic mode (NEFT/IMPS/NACH) approved by RBI. Cheques/warrants are largely phased out by SEBI LODR Reg. 12 and reinforced via SEBI’s June 10, 2024 circular mandating electronic payments (post KYC/nomination updates). (CAIRR, olectra)
- Company timelines: Once declared, dividends must be paid within 30 days. Any unpaid amount must be moved to an Unpaid Dividend Account within 7 days after those 30 days; if still unclaimed for 7 years, both the amount and the underlying shares go to the Investor Education and Protection Fund (IEPF) (you can claim later from IEPF). (CAIRR)
Investor checklist to avoid delays
- Ensure PAN/KYC/nomination are updated with your depository participant (DP) and the company’s RTA.
- Match bank account details in your demat/KYC to receive NEFT credits seamlessly (a SEBI requirement for electronic-only payout). (olectra)
Dividend Math (Made Simple)
- Dividend Yield
Dividend Yield=Annual Dividend per ShareCurrent Market Price×100%\text{Dividend Yield} = \frac{\text{Annual Dividend per Share}}{\text{Current Market Price}} \times 100\%
- Payout Ratio
Payout Ratio=Total DividendsNet Profit×100%orDPSEPS×100%\text{Payout Ratio} = \frac{\text{Total Dividends}}{\text{Net Profit}} \times 100\% \quad \text{or} \quad \frac{\text{DPS}}{\text{EPS}} \times 100\%
Example: If ABC Ltd. pays ₹20 per share annually and the stock trades at ₹800, yield = 20/800=2.5%20/800=2.5\%.
Note: On ex-date, price typically adjusts lower by roughly the cash dividend, but actual moves depend on market factors.
Taxation of Dividends in India (FY 2025-26)
Residents
- Since 1 April 2020, dividends are taxable in your hands at your slab (DDT abolished). Report under “Income from Other Sources.” (Income Tax Department)
- TDS (Section 194): From 1 April 2025, companies deduct 10% TDS if your total dividends from that company (and RTAs aggregating for the company) exceed ₹10,000 in a financial year (earlier ₹5,000). (Cipla, The Economic Times)
- If PAN not valid/linked, many companies apply 20%. Certain exemptions/forms (e.g., 15G/15H for eligible investors with nil estimated tax) exist. (bhil.in, Mindtree Investors Archive)
NRIs
- TDS (Section 195): Generally 20% (plus surcharge and cess), subject to a lower DTAA rate if you furnish TRC/Form 10F and satisfy treaty conditions. No threshold applies. (Tax2win, ClearTax)
Tip: Even if TDS is cut, your final tax depends on your slab/treaty. You may need to pay additional tax or can claim a refund while filing your ITR.
Real-World Flow: How a Cash Dividend Reaches You
- Board meeting/AGM approves dividend and sets the record date. Exchanges mark the ex-date accordingly (often same day under T+1). (Zerodha, Zerodha Support)
- Your demat holdings on record/ex-date are fetched by the RTA.
- Company funds the dividend account within 5 days of declaration (Section 123). (CAIRR)
- TDS is applied (Section 194/195). Credit is sent electronically to your registered bank account, within 30 days of declaration. (CAIRR)
- If undelivered/unclaimed, it moves to Unpaid Dividend Account, and after 7 years to IEPF (claimable with documentation). (CAIRR)
FAQs
1) Do I have to buy before the record or the ex-date?
Buy before the ex-date. Under T+1, ex-date commonly coincides with record date; buying on ex-date won’t fetch the dividend. (Zerodha, Zerodha Support)
2) How do I know my dividend got credited?
You’ll see a bank entry (NEFT/IMPS/NACH) and an email/SMS from the RTA/company. Electronic mode is mandated by SEBI. (CAIRR, olectra)
3) What if I didn’t receive the dividend?
Contact the RTA with your PAN, DP-ID/Client-ID. If 30 days lapse, funds go to the Unpaid Dividend Account; after 7 years they move to IEPF, from where you can claim them back. (CAIRR)
4) Are mutual fund dividends different?
MF “dividends” (now called IDCWs) are also taxable to you; separate Section 194K TDS rules apply for residents and thresholds (post-Budget 2025 changes apply from 1 April 2025). Check your AMC’s TDS note for specifics. (TaxBuddy.com)
5) What documents help NRIs get a reduced TDS?
A valid Tax Residency Certificate (TRC), Form 10F, and self-declaration per the relevant DTAA, before the RTA’s cut-off. Otherwise, standard 20% (plus surcharge/cess) may apply. (Tax2win)
Common Mistakes to Avoid
- Buying on the ex-date expecting dividends—too late under T+1. (Zerodha)
- Ignoring KYC/nomination/bank updates—SEBI requires these for electronic payout. (olectra)
- Assuming dividends are tax-free—they’ve been taxable in investors’ hands since FY 2020-21. (Income Tax Department)
Key Formulas & Quick Reference
- Dividend Yield = (Annual DPS ÷ CMP) × 100%
- Payout Ratio = (Total Dividends ÷ Net Profit) × 100%
- TDS (Residents, Sec 194) = 10% if yearly dividend > ₹10,000 from FY 2025-26; company may deduct 20% without valid PAN. (Cipla, bhil.in)
- TDS (NRIs, Sec 195) = 20% (plus surcharge/cess) or DTAA rate (with TRC). (ClearTax)
- Timelines: Pay within 30 days of declaration → Unpaid Dividend A/c within 7 days after that → Transfer to IEPF after 7 years. (CAIRR)
Why Dividends Matter for Indian Investors
- Offer regular cash flow without selling shares.
- Improve total returns, especially in mature, cash-generative sectors (IT services, FMCG, utilities, PSUs).
- Provide discipline signals—consistent payouts may reflect governance and predictable cash flows (not a guarantee of future performance).
Related Reading (Endovia Wealth)
- Basics of Market Capitalization
- Understanding Bull vs Bear Markets
- How to Read a Company’s Annual Report
Compliance & Sources:
- T+1 ex/record date practice: Zerodha Varsity & Support. (Zerodha, Zerodha Support)
- Companies Act timelines (Sections 123 & 124): ca2013.com annotated sections. (CAIRR)
- SEBI LODR Reg. 12 & electronic payment circular (10 June 2024): ca2013.com; SEBI circular. (CAIRR, olectra)
- Taxation & TDS: CBDT ITR instructions confirming post-2020 taxability; Budget 2025 changes to Section 194 threshold (₹10,000) and corporate disclosures for FY 2025-26; DTAA/Section 195 guidance. (Income Tax Department, The Economic Times, Cipla, ClearTax)
This article is educational and not investment/tax advice. For personalised advice, consult a SEBI-registered investment adviser or tax professional.