How to Avoid TDS on Dividend Income in FY 2025-26

Tax Deducted at Source (TDS) refers to the tax that is deducted by the payer at the time an income is credited or paid to the recipient. Certain types of income, such as interest and dividends, are subject to TDS under the Income Tax Act. Over the years, the taxation of dividend income has undergone significant changes, including the application of TDS. This blog explains the current rules for TDS deduction on dividend income and how eligible taxpayers can legally avoid TDS.

The new rules: TDS thresholds for FY 2025-2026

Earlier, companies distributing dividends to shareholders were required to pay Dividend Distribution Tax (DDT). However, the Finance Act, 2020 abolished DDT and shifted the tax liability to shareholders. As a result, dividend income became taxable in the hands of the recipient as per their applicable income tax slab. 

Further, for all dividends declared or paid on or after April 1, 2020, TDS at 10% applies if the total dividend income exceeds ₹5,000 from a single company or mutual fund in a financial year. 

The TDS rate increases to 20% if residents do not furnish their Permanent Account Number (PAN). This makes PAN submission crucial to avoid higher TDS. 

For Non-Resident Indians (NRIs), dividend income is subject to 20% TDS, irrespective of PAN submission. However, this rate may be reduced if benefits under a Double Taxation Avoidance Agreement (DTAA) are available. 

What changed from FY 2025-2026

Post Budget 2025, the TDS threshold on dividend income for resident investors was increased to ₹10,000 from ₹5,000 per company or mutual fund in a financial year. 

Form 15G vs Form 15H: Which one do you need?

While the 2020 amendments made dividend income taxable, TDS can be avoided if your total income for the financial year is below the basic exemption limit. This can be done by submitting Form 15G or Form 15H to the dividend-paying entity. 

Note: Senior citizens can submit Form 15H even if their total income is more than the basic exemption limit, as long as their overall tax liability is nil. 

Where and when to submit Form 15G or Form 15H

While there is no statutory deadline for submitting Form 15G or Form 15H, it is advisable to submit it at the beginning of the financial year to prevent unnecessary TDS deductions. 

The form must be submitted to the entity responsible for deducting TDS. So, in the case of dividends, you must submit it to the company or the mutual fund house distributing the dividend. 

What happens if you do not submit Form 15G or Form 15H

Submitting Form 15G or Form 15H is not mandatory. Therefore, failure to do so does not involve any penalties or charges. However, not submitting it means letting your dividend income be subject to TDS. Instead of the gross dividend, you will receive the dividend amount net of TDS. 

If your actual tax liability is lower than the TDS deducted, then you can claim the excess amount as a refund while filing your Income Tax Return (ITR). However, refunds take time, and your money remains blocked until the refund is processed. 

Conclusion

Dividend income is subject to TDS under current tax laws. However, eligible investors can avoid TDS by submitting Form 15G or Form 15H. Understanding the applicable rules for TDS deduction, thresholds, and declaration forms can help investors avoid unnecessary deductions and manage their cash flow more effectively.