Shares and mutual funds are ways many people make money. While the rest of this money could be profit from selling the investment, some comes as dividends. “Do I have to pay capital gains tax on dividends?” is a regular question. Let us straighten out the uncertainty.
In what sense is a dividend?
A dividend is the money a company distributes to each of its owners from profits. For instance, you will get that amount straight into your bank account should you own Infosys shares and the company announces a ₹10 per share dividend.
Does Dividend Capital Gains Tax exist?
The short response is no—capital gains are not taxed as income. Under the Income Tax Act, dividends are taxed instead as “income from other sources.” They are included in your overall income and taxed according to your slab rate of income tax.
Then What is Capital Gains Tax?
When you sell your mutual funds or shares and make a profit, you are liable for capital gains tax. This depends on:
- Short-Term Capital Gains (STCG):
- For mutual funds or shares kept for less than one year
- Paid 15% tax.
- For mutual funds or shares kept for less than one year
- Long-Term Capital Gains (LTCG):
- For shares or mutual funds kept for more than one year
- Taxed at 10% (just in case gains surpass ₹1 lakh annually).
- For shares or mutual funds kept for more than one year
Important Point: Never combine capital gains with dividend income.
| Revenue Type | Tax Management |
| Dividend | Charged according to your slab rate |
| Salary | Charged according to your slab rate |
| Capital Appreciation | Paid under STCG or LTCG guidelines |
Thus, it is technically untrue when someone claims capital gains tax on dividends—these are two different tax rates.
An illustration might be:
You received ₹20,000 as dividends and earned ₹1.5 lakh by selling mutual fund units after 2 years.
- ₹20,000 dividend → added to your slab-based income and taxed.
- Tax-free, remaining ₹50,000 taxed at 10% = ₹5,000; ₹1.5 lakh long-term capital gain → ₹1 lakh.
Final Thoughts:
India does not impose capital gains tax on dividends. While capital gains are taxed upon asset sale, dividends are taxed like regular income. While submitting your income tax return, keep both kinds of income separate and make plans to save tax.
