Tag: Dividend

Expenditure Relating to Exempt Income under the Income-tax Act, 2025: Section 14 and Rule 14 (Old Section 14A and Rule 8D) (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 15 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 14 of the Income-tax Act, 2025 (old section 14A) disallows any expenditure incurred in relation to income that does not form part of the total income, even if the exempt income was not earned in that year (section 14(3)).
  • If the Assessing Officer is not satisfied with the assessee’s claim of expenditure, or with a claim that none was incurred, he determines the amount by the prescribed method, which is Rule 14: expenditure directly related to exempt income plus 1% of the annual average of the monthly averages of the opening and closing value of investments that yield exempt income, subject to a cap at the total expenditure claimed.
  • The old Rule 8D had separate parts for interest and a 0.5% charge; Rule 14 of the Rules 2026 is shorter and uses 1% of the investment value.
  • Dividend income is taxable and no deduction is allowed against it at all from 01/04/2026 (section 93(2)), so the disallowance in section 14 matters for genuinely exempt income such as agricultural income, exempt interest and exempt capital gains.

A taxpayer cannot claim a deduction for the cost of earning income that is not taxed. In the Income-tax Act, 2025 (from 01/04/2026) this is section 14, which replaces the old section 14A, and the method for working out the amount is in Rule 14, which replaces Rule 8D.

What section 14 says

  1. No deduction is allowed for expenditure incurred by the assessee in relation to income that does not form part of the total income (section 14(1)). This applies irrespective of anything to the contrary in the Act.
  2. Determination by the Assessing Officer (section 14(2)): if he is not satisfied with the correctness of the expenditure claimed in relation to the exempt income, or with the assessee’s claim that no expenditure was incurred, he determines the amount by a method that is prescribed.
  3. Year of the expenditure (section 14(3)): the section applies where the expenditure was incurred in a tax year even though the exempt income has not accrued, arisen or been received in that year.

Rule 14: the prescribed method

The expenditure in relation to income that does not form part of total income is the sum of:

  • (a) the expenditure directly relating to such income; and
  • (b) an amount equal to 1% of the annual average of the monthly averages of the opening and closing balances of the value of investments, income from which does not or will not form part of total income.

The total of (a) and (b) cannot exceed the total expenditure claimed by the assessee (Rule 14(2)).

Compared with the old Rule 8D

The old rule worked in three parts: direct expenditure, interest not directly attributable (by a formula on investments and total assets) and 0.5% of the average investment. Rule 14 of the Rules 2026 has only two parts, direct expenditure and 1% of the investment value, so there is no separate interest apportionment. Check the text of the Rule if a case turns on a particular head, such as interest.

Example. A company’s investments that yield exempt income (for example, tax-exempt bonds) had an annual average of the monthly averages (of opening and closing balances) of ₹1,00,00,000. The 1% charge is ₹1,00,000. If direct expenditure on those investments (such as demat charges) is ₹20,000, the disallowance is ₹1,20,000, provided the company has claimed at least that much total expenditure. If it claimed only ₹90,000 in total, the disallowance is capped at ₹90,000.

What is “income that does not form part of total income”

This covers income excluded under section 11 and Schedules II to VII, agricultural income and other exempt receipts. Dividend is not exempt: it is taxed under section 92(2)(a), and Finance Act 2026 substituted section 93(2) to say that no deduction at all is allowed against dividend income or income from units of specified mutual funds and UTI units. So the earlier practice of claiming interest up to 20% of the dividend is gone, and the section 14 question for dividend does not arise.

Practical points

  1. Show the exempt-income expenditure in the accounts. An assessee who shows that no expenditure was incurred must be able to support the claim, because the Assessing Officer can disbelieve it under section 14(2)(b).
  2. Separate funds. Using separate bank accounts and clearly separate investments helps show that borrowed funds were not used for exempt investments.

How CSM & Co LLP can help

We compute the section 14 disallowance, plan investments and funding and defend the claim in assessment. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which section replaces 14A and Rule 8D?

Section 14 of the Income-tax Act, 2025 and Rule 14 of the Income-tax Rules, 2026.

What is the rule in section 14?

No deduction is allowed for expenditure incurred in relation to income that does not form part of the total income (section 14(1)). It applies even where the expenditure was incurred in a tax year in which the exempt income was not earned, accrued or received (section 14(3)).

How is the disallowed amount computed?

If the Assessing Officer is not satisfied with the correctness of the assessee’s claim of expenditure, or with a claim that no expenditure was incurred in relation to exempt income, he determines the amount as prescribed (section 14(2)). Under Rule 14 it is the sum of (a) expenditure directly relating to exempt income and (b) 1% of the annual average of the monthly averages of the opening and closing balances of the value of investments, income from which does not or will not form part of total income. The total cannot exceed the expenditure claimed (Rule 14(2)).

Does the 1% apply to all investments?

Only to investments whose income does not or will not form part of the total income. Investments that give taxable income are left out of the average.

Is interest on borrowings to buy shares separately disallowed?

Rule 14 does not have a separate interest limb; the 1% of investment value covers the indirect expenses. Interest that relates directly to an investment giving exempt income is part of the direct expenditure in (a).

What about dividend income?

Dividend is taxable under section 92(2)(a), and from 01/04/2026 no deduction is allowed against it (section 93(2)). The section 14 disallowance therefore concerns income that is genuinely outside the total income, such as agricultural income and exempt interest or gains under the Schedules.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Dividend and Deemed Dividend under the Income-tax Act, 2025: Meaning, Tax, TDS and Section 2(40) (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 11 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Dividend is taxed in the shareholder’s hands as income from other sources (section 92(2)(a)) at the normal rates, and no expense, including interest, can be deducted against it from 01/04/2026 (section 93(2) as substituted by Finance Act 2026).
  • The Act’s meaning of dividend (section 2(40)) is wider than the cash dividend a company declares: it includes distribution of accumulated profits, debentures, payments on liquidation or capital reduction, and loans or advances by a closely held company to a shareholder with 10% or more voting power, or to a concern in which that shareholder has a substantial interest (deemed dividend).
  • From 01/04/2026 a payment by a company on buy-back of its own shares is no longer within the dividend definition; it is dealt with under the capital gains provisions.
  • A domestic company deducts TDS of 10% on dividend (section 393(1), Table Sl. No. 7); there is no deduction from an individual’s dividend paid by a mode other than cash if the total in the year does not exceed ₹10,000 (section 393(4)).

A dividend is a share of a company’s profits paid to its shareholders. For tax, the Income-tax Act, 2025 (in force from 01/04/2026) uses a wider meaning in section 2(40) and then taxes it as income from other sources under section 92(2)(a). The old Dividend Distribution Tax was abolished long ago, so the tax is on the shareholder.

What counts as dividend (section 2(40))

Dividend includes:

  1. Any distribution by a company of accumulated profits, whether capitalised or not, that releases assets of the company to its shareholders.
  2. A distribution of debentures, debenture-stock or deposit certificates to shareholders, and a distribution of bonus shares to preference shareholders, to the extent of accumulated profits.
  3. A distribution on liquidation, to the extent attributable to accumulated profits just before liquidation.
  4. A distribution on reduction of capital, to the extent of accumulated profits.
  5. Deemed dividend (section 2(40)(e)), described next.

“Accumulated profits” includes all profits of the company up to the date of the distribution or payment (up to liquidation in case 3). For an amalgamated company, the accumulated profits of the amalgamating company on the date of amalgamation are added.

Buy-back is no longer dividend

Before 01/04/2026, sub-clause (f) treated a payment by a company on the purchase of its own shares as dividend. Finance Act 2026 omitted it. A buy-back is now taxed as a transfer under the capital gains provisions (section 69 of the 2025 Act as amended, which also has a higher tax for promoters).

Deemed dividend: loans to shareholders

If a company in which the public is not substantially interested (a closely held company) pays any sum, to the extent it has accumulated profits, as:

  • an advance or loan to a shareholder who is the beneficial owner of shares carrying at least 10% of the voting power (not shares with a fixed rate of dividend); or
  • an advance or loan to a concern (a HUF, firm, association of persons, body of individuals or company) in which that shareholder is a member or partner and has a substantial interest; or
  • a payment on behalf of, or for the individual benefit of, such a shareholder,

the amount is treated as dividend. A person has a substantial interest in a concern other than a company if beneficially entitled to 20% or more of its income at any time in the tax year (section 2(40), explanation (D)).

Example. X Pvt Ltd (closely held) has accumulated profits of ₹40 lakh. It lends ₹25 lakh to Mr S, who holds 12% of the voting power. The ₹25 lakh is treated as dividend in Mr S’s hands because the loan is within the accumulated profits. Had the loan been ₹60 lakh, only ₹40 lakh would be deemed dividend.

What is not dividend

  • A loan or advance in the ordinary course of business, where lending money is a substantial part of the company’s business.
  • A dividend paid by the company that is set off against an earlier amount already treated as deemed dividend, to that extent.
  • A distribution of shares by the resulting company in a demerger.
  • Certain advances or loans between two group entities, where one is an IFSC finance company or finance unit, the other is located outside India, and the parent is listed outside India in a country notified by the Central Government.
  • A distribution on liquidation or capital reduction in respect of shares issued for full cash consideration where the holder cannot take part in surplus assets on liquidation.

How dividend is taxed

  • Head: income from other sources (section 92(2)(a)).
  • Rate: the normal rates on the shareholder’s total income. There is no separate flat rate for a resident.
  • When: a dividend is the income of the tax year in which it is declared, distributed or paid; an interim dividend is the income of the year in which it is unconditionally made available to the shareholder entitled to it (section 7(2)).
  • Deductions: none. Section 93(2), as substituted by Finance Act 2026, says no deduction is allowed against dividend income or income from units of specified mutual funds and UTI units. Earlier, interest expense up to 20% of the dividend was allowed. Section 93(1)(a), which allows commission paid for realising interest on securities, no longer mentions dividend either.

TDS on dividend

A domestic company deducts 10% of any dividend (including on preference shares) before paying it, and the table shows no threshold (section 393(1), Table Sl. No. 7). No tax is deducted in these cases (section 393(4), Table Sl. No. 10):

  • dividend paid to LIC, GIC and the other specified insurance bodies, and to other notified persons; and
  • dividend to an individual shareholder paid by a mode other than cash, if the total dividend paid or likely to be paid in the tax year does not exceed ₹10,000.

A shareholder who qualifies can give the declaration allowed under section 393(6) in the cases listed there. The TDS is credited against your tax, so claim it in the return using your tax statement.

Practical points

  1. Loans from your own company. A shareholder-director who borrows from a closely held company should check the 10% voting power test and accumulated profits before drawing the money, because the loan can become taxable dividend.
  2. Review buy-back plans. Since 01/04/2026 they are taxed as capital gains.
  3. Financing shares by borrowing. The interest is no longer deductible against dividend income. Whether it can be claimed anywhere else was not examined for this post.
  4. Foreign and non-resident dividends have separate rates and treaty rules and are not covered here.

How CSM & Co LLP can help

We advise closely held companies on loans to shareholders and directors, reporting of dividend income and TDS compliance on dividend. Please reach out to our team and we will be happy to assist.

Frequently asked questions

What is deemed dividend?

Deemed dividend arises when a company in which the public is not substantially interested pays money, to the extent of its accumulated profits, as a loan or advance to a shareholder who is the beneficial owner of shares carrying 10% or more of the voting power, or to a concern in which that shareholder is a member or partner and has a substantial interest, or pays on behalf of or for the individual benefit of such a shareholder (section 2(40)(e)). The amount is taxed as the shareholder’s dividend income.

What does “substantial interest” mean for a concern that is not a company?

A person has a substantial interest in a concern, other than a company, if at any time in the tax year the person is beneficially entitled to not less than 20% of the income of the concern (section 2(40), explanation (D)).

Which loans are not deemed dividend?

An advance or loan made to a shareholder or the concern by a company in the ordinary course of its business, where lending money is a substantial part of the company’s business; a dividend that is set off against an amount earlier treated as deemed dividend; a distribution of shares by the resulting company in a demerger; and certain loans between group entities involving an IFSC finance company or finance unit and a foreign-listed group (section 2(40), exclusions (i) to (v)).

Is the company’s buy-back payment still a dividend?

No, from 01/04/2026. The sub-clause that treated a payment by a company on purchase of its own shares as dividend was omitted by Finance Act 2026. Buy-back proceeds are taxed under the capital gains provisions (see section 69).

Can I deduct interest paid on a loan used to buy shares?

No. Section 93(2), as substituted by Finance Act 2026, allows no deduction against dividend income or income from units of specified mutual funds and UTI units. Earlier, interest up to 20% of the dividend could be deducted.

Is there TDS on dividend?

Yes. A domestic company deducts 10% before paying any dividend (section 393(1), Table Sl. No. 7), with no threshold in the table. The deduction is not made on an individual shareholder’s dividend if it is paid by a mode other than cash and the total during the tax year does not exceed ₹10,000, and for certain shareholders such as LIC, GIC and other specified institutions (section 393(4), Table Sl. No. 10).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Income from Other Sources under the Income-tax Act, 2025: Section 92 Gifts, Interest, Lottery Winnings and Compensation (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 07 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 92 of the Income-tax Act, 2025 (old section 56) taxes every kind of income that does not fit another head, and lists specific items: dividend, lottery and game winnings, interest on securities, forfeited advance, employment termination compensation, insurance maturity above premiums, interest on enhanced compensation, and gifts above ₹50,000 in a year.
  • Gifts of money, land, building, shares, jewellery and other listed property above ₹50,000 are taxed unless they come from a relative, at marriage, by will or inheritance, in contemplation of death, or fall in the other exceptions of section 92(3); a property bought below stamp duty value is taxed only if the gap exceeds the higher of ₹50,000 or 10% of the price.
  • Lottery, game show, card game, gambling and race winnings are taxed at a flat 30% with no deduction (sections 194(1) and 94(4)); net online game winnings are also at 30%.
  • Interest on enhanced compensation is taxed in the year of receipt, with 50% deducted (sections 278(1) and 93(1)(f)); family pension gets the lower of one-third or ₹25,000 (₹15,000 in the old regime) (section 93(1)(d)).

“Income from other sources” is the last of the five heads of income. Under the Income-tax Act, 2025, which applies from 01/04/2026, section 92 says income of every kind that is not exempt and does not fall under salary, house property, business or profession, or capital gains is taxed here (section 92(1)). Section 92(2) then lists specific items. Section 93 allows deductions, section 94 bars some deductions, and section 95 applies the business-profits rules in section 38(1) to (4) to computations under section 92.

This replaces sections 56 to 59 of the 1961 Act. One item in the old section 56 is gone: the tax on a closely held company’s share issue above fair value (56(2)(viib), “angel tax”) does not appear in the 2025 Act’s list.

What section 92(2) lists

Item Clause Notes
Dividend (a) Taxed here; no deduction against it (section 93(2))
Winnings from lottery, crossword puzzle, races, card games, other games, gambling, betting (b) 30% flat (section 194(1))
Employees’ contributions to PF, superannuation, ESI or other welfare funds received by the employer (c) If not taxed as business income (late deposit)
Keyman insurance receipts, including bonus (d) If not taxed as business income or salary
Interest on securities (e) If not taxed as business income
Income from hiring out machinery, plant or furniture (f), (g) Also buildings if letting is inseparable
Advance received in negotiations for transfer of a capital asset, forfeited when the deal fails (h)
Interest on compensation or enhanced compensation (section 278(1)) (i) 50% deduction
Compensation on termination of employment or change in its terms (j)
Specified sum received by a unit holder from a business trust (k) Formula A less B less C
Life insurance receipts above premiums not claimed as deduction (not ULIP, not keyman) (l) If not exempt under Schedule II, Sl. No. 2
Sums or property received without or for inadequate consideration (m) Gifts, see below

Interest on savings accounts, fixed deposits, recurring deposits and bonds and rent that is not business or property income are taxed under section 92(1) or (2)(e), as before.

Gifts above ₹50,000 (section 92(2)(m))

A person who receives, from any person or persons in the tax year:

  1. Money without consideration totalling more than ₹50,000: the whole sum is taxed.
  2. Immovable property without consideration whose stamp duty value exceeds ₹50,000: the stamp duty value is taxed.
  3. Immovable property for a consideration: the stamp duty value that exceeds the consideration is taxed if that excess is more than the higher of ₹50,000 and 10% of the consideration.
  4. Other property without consideration (shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, works of art, bullion, virtual digital assets) whose aggregate fair market value exceeds ₹50,000: the whole fair market value is taxed.
  5. Other property for a consideration that is less than its fair market value by more than ₹50,000: the excess of fair market value over the consideration is taxed.

Example. A buys a flat for ₹50,00,000. If the stamp duty value is ₹54,00,000, the excess of ₹4,00,000 is less than 10% of the price (₹5,00,000), so nothing is taxed. If the stamp duty value is ₹60,00,000, the excess of ₹10,00,000 is more than ₹5,00,000, so ₹10,00,000 is taxed as income from other sources.

If the agreement date and the registration date differ, the stamp duty value on the date of the agreement can be used, provided the consideration was paid in whole or in part by a specified banking or online mode on or before the date of the agreement (section 92(4)(a)). If the stamp duty value is disputed, the Assessing Officer can refer it to a Valuation Officer (section 92(4)(b)).

When a gift is not taxed (section 92(3))

  • From any relative (definition above and in section 92(5)(g)).
  • On the occasion of the marriage of the individual.
  • Under a will or by inheritance.
  • In contemplation of death of the payer or donor.
  • From a local authority.
  • From or by a registered non-profit organisation, except when received by a “related person” of it (section 355(h)).
  • In a transaction that is not regarded as a transfer under section 70(1) (the exact clauses of section 70(1) are listed in section 92(3)(g)).
  • From an individual by a trust created solely for the benefit of the individual’s relative.
  • From a class of persons prescribed by the Rules.

Remember clubbing: income that later arises from a gift to a spouse or a daughter-in-law is taxed in the donor’s hands (section 99), even though the gift itself is exempt as a gift from a relative.

Winnings from lotteries, games and betting

  • Tax rate: 30% flat on winnings from a lottery, crossword puzzle, race (including horse races, but not the business of owning and maintaining race horses), card game or any other game, gambling or betting (section 194(1), Table Sl. No. 1). Net winnings from an online game (computed as prescribed) are also at 30% (Table Sl. No. 5).
  • No deduction: no expenditure or allowance can be set against these winnings (section 94(4)). The exception is a race horse owner’s own business income (section 94(5)).
  • Meaning: “lottery” includes prizes by draw of lots, by chance or otherwise under any scheme; “card game and other game of any sort” includes a game show or entertainment programme on television or electronic mode where people compete to win prizes (section 92(5)(b) and (e)).
  • TDS: the payer deducts tax at the rates in force when the winnings in a single transaction exceed ₹10,000 (section 393(1), Table Sl. Nos. 1 and 3). A person who stocks, sells or distributes lottery tickets suffers 2% TDS on commission or prize above ₹20,000 (Table Sl. No. 4).
  • Computation: the 30% is charged on the winnings alone, and the tax on the rest of the income is worked out as if the winnings were not part of the total income (section 194(1)(a) and (b)).

Interest on compensation (section 92(2)(i) and 278(1))

Interest on compensation or enhanced compensation (for example, on land acquisition) is taxed in the tax year in which it is received, whatever the year to which it relates (section 278(1)). Half of it is deducted and no other deduction is allowed (section 93(1)(f)). The enhanced compensation itself is dealt with under the capital gains provisions (section 67).

Deductions allowed (section 93) and not allowed (section 94)

  • Commission or remuneration to a banker or other person for collecting interest on securities (section 93(1)(a), as substituted by Finance Act 2026, which dropped the reference to dividend).
  • For employees’ contributions: the deduction allowed for them under the business rules (section 93(1)(b)).
  • For hire of machinery, plant, furniture (and buildings): depreciation and expenses as for business (section 93(1)(c)).
  • Family pension: one-third of the pension or ₹25,000, whichever is less, where the tax is computed under section 202(1) (the new regime); one-third or ₹15,000, whichever is less, otherwise (section 93(1)(d)).
  • Interest on enhanced compensation: 50% of the income (section 93(1)(f)).
  • Commutation of pension from a specified fund, and gratuity on the death of an employee: the whole amount (section 93(1)(g) and (h)).
  • Any other expense that is not capital and is laid out wholly and exclusively for making the income (section 93(1)(e)).
  • Not allowed: personal expenses, interest payable outside India on which tax has not been paid or deducted, and salary payable outside India unless tax was paid or deducted (section 94(1)). No deduction at all is allowed against dividend income or against income from units of specified mutual funds and UTI units (section 93(2)).

How CSM & Co LLP can help

We help with gift documentation, valuation questions on property purchases, reporting winnings and compensation interest, and replies to notices about unexplained receipts. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which section of the 2025 Act replaces section 56?

Section 92 (what is taxed), section 93 (deductions), section 94 (amounts not deductible) and section 95 (profits chargeable) of the Income-tax Act, 2025.

Is a gift of more than ₹50,000 taxable?

Yes, if it is money (total above ₹50,000 in the tax year, then the whole sum), or immovable or other property given free of cost, whose stamp duty value or fair market value exceeds ₹50,000 (section 92(2)(m)). It is not taxed if it comes from a relative, on the occasion of the individual’s marriage, under a will or inheritance, in contemplation of death, from a local authority, from a registered non-profit organisation in the cases listed, in a transaction that is not a transfer under section 70(1), or from an individual to a trust for the benefit of the individual’s relative (section 92(3)).

Who is a relative for the gift rules?

For an individual: spouse; brother or sister; brother or sister of the spouse; brother or sister of either parent; any lineal ascendant or descendant; any lineal ascendant or descendant of the spouse; and the spouse of any of those persons listed from brother or sister onwards. For a HUF, any member (section 92(5)(g)).

How is lottery or game show income taxed?

At a flat 30% on the winnings (section 194(1), Table Sl. No. 1), with no deduction for expenditure or allowance (section 94(4)). A game show or an entertainment programme where people compete to win prizes counts as a card game or other game (section 92(5)(b)). TDS applies where a single payment exceeds ₹10,000 (section 393(1), Table Sl. No. 1).

Is interest on enhanced compensation taxable in the year it is awarded?

No. It is taxed in the tax year in which it is received (section 278(1)), under section 92(2)(i), after a deduction of 50% of the income (section 93(1)(f)), and no other deduction is allowed against it.

Can I deduct expenses against dividend income?

No. From 01/04/2026 section 93(2), as substituted by Finance Act 2026, allows no deduction against dividend income or income from specified mutual fund and UTI units. The earlier limit of interest expense up to 20% of the dividend no longer applies.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.