How Dividends From Indian Companies and Mutual Funds Are Taxed for NRIs

You hold Rs 10 lakh of an Indian bluechip, the company declares a healthy dividend, and the credit that lands in your NRO account is roughly a fifth lighter than the number announced. A resident sitting next to you on the same cap table now gets the first Rs 10,000 of dividends from that company with no TDS at all, a threshold that rose from Rs 5,000 on April 1, 2025. You get no threshold. The company withholds 20% plus surcharge and cess from your first rupee, under a rule written for non-residents, and unless you filed some paperwork before the record date, that deduction is higher than the tax you actually owe.

This is one of the quieter cash leaks in an NRI portfolio. It is not dramatic per dividend the way a property-sale deduction is, but it repeats every year on every holding, and most NRIs never claw back the excess. Worse, the portion withheld above your treaty rate is often not even creditable in your home country, so it is not a timing problem you recover later. It is money that strands in the Indian system until you file a return to pull it out.

The 30-second answer: Since Dividend Distribution Tax was abolished by the Finance Act 2020 (for dividends paid on or after April 1, 2020), dividends are taxable in the shareholder's hands. For an NRI, an Indian company deducts TDS under Section 195 at 20% plus 4% cess, an effective 20.8%, with surcharge on top above Rs 50 lakh but capped at 15% on dividends, so a worst case near 23.92%. There is no small-dividend threshold for NRIs. You cut the rate to your treaty rate, 10% for a UK or UAE resident, by giving the company a valid Tax Residency Certificate and an e-filed Form 10F before the record date. No surcharge or cess is added on a treaty rate. For a US or Canada resident the treaty rate is 25%, above domestic, so the 20.8% stands. Mutual fund IDCW is withheld under Section 196A and the treaty rate on it is contested. Declare it in ITR-2 by July 31, 2026.

This guide is part of our NRI tax-filing series. For the full picture of putting the return together, start with the NRI ITR filing guide for AY 2026-27, then come back here for the dividend detail.

What follows assumes you know what an NRO account is and what your residency status means. The part that costs real money is narrower: the exact rate the company applies, the country split that decides whether the paperwork is worth doing, how the dividend is finally settled on your return with credit for the TDS, and the separate, messier, genuinely unsettled treatment of mutual fund IDCW.

The 2020 switch moved the tax onto you, and Section 195 gives you no cushion

For most of the period NRIs have held Indian equities, dividends arrived tax-free. The company paid Dividend Distribution Tax to the government before distributing, and what reached the shareholder was exempt under Section 10(34). You did not declare it, you did not pay on it, there was no TDS to chase.

The Finance Act 2020 abolished DDT and moved India to the classical system: the company pays the dividend out of post-corporate-tax profits, and it is then taxable in the hands of whoever receives it, for any dividend paid on or after April 1, 2020. Section 10(34) went with it, and the old Section 115BBDA that taxed residents on dividends above Rs 10 lakh became redundant and was withdrawn.

For a resident this just means dividends join total income and are taxed at slab rates. For an NRI it means two things at once. The dividend is now your taxable Indian income, so it belongs on your return. And because almost any taxable payment to a non-resident triggers withholding, the company must deduct TDS before paying you, under Section 195.

Here is the asymmetry residents do not feel. Section 194 (company dividends) and Section 194K (mutual fund payouts) both carry a Rs 10,000 per-payer threshold for residents from April 1, 2025, up from Rs 5,000. Below that the resident gets the dividend gross. Section 195 carries no threshold whatsoever. An NRI's deduction begins at the first rupee of dividend, on a holding of any size, and it begins at a rate set for the department's caution, not for your accuracy. That structural difference, not the headline rate, is why NRIs over-pay so reliably.

The rate if you do nothing: 20.8%, and how surcharge stacks

The base TDS rate on dividends paid to a non-resident under Section 195 is 20%. On that sits a health and education cess of 4%, computed on tax plus surcharge. With no surcharge, 20% plus 4% cess is an effective 20.8%.

Surcharge is the variable layer. It is triggered by your total India income, not by any single dividend, and the company applies it from what it can see. The general bands are 10% above Rs 50 lakh, 15% above Rs 1 crore, 25% above Rs 2 crore, and 37% above Rs 5 crore. The relief almost no one states plainly: the surcharge on the tax attributable to dividend income is capped at 15%, even if your other income would attract 25% or 37%. So the worst-case all-in rate is 20% base, plus 15% surcharge on that, plus 4% cess on the total, which works out to about 23.92%. For most NRIs whose India income sits below Rs 50 lakh, no surcharge applies and the deduction is the flat 20.8%.

One trap to clear immediately, because it changed in your favour. Until March 2025, an NRI who had not filed Indian returns could be hit with Section 206AB, which doubled or otherwise inflated the TDS rate for non-filers. The Finance Act 2025 omitted Section 206AB from April 1, 2025. So a long-absent NRI who never filed in India no longer faces a punitive non-filer rate on dividends; the deduction is the ordinary 20% (plus surcharge and cess). What still bites is Section 206AA: if the company does not hold a valid, operative PAN for you, it must deduct at the higher of the prescribed rates, and a treaty rate cannot be applied at all without a PAN on file. An inoperative PAN, the usual cause being an unlinked or lapsed record, quietly turns a recoverable 20% into a worse number and blocks the very treaty relief this guide is about. Keep the PAN operative.

The country split that decides whether the paperwork is worth doing

This is the lever, and the single most misreported point in NRI dividend advice. India's treaties with the UK, USA, UAE and Canada each cap, in their dividend article (Article 10 in every case), the rate India may charge a resident of that country. Where the treaty rate is below the domestic 20%, you are entitled to the lower of the two. The mistake is assuming the treaty always wins. For two of these four countries, it does not.

Country of residence	Treaty rate on a portfolio dividend	Beats domestic 20%?	What you actually do
UK	10% (Article 10, India-UK)	Yes, by half	File TRC and Form 10F before the record date
UAE	10% (Article 10, India-UAE)	Yes, by half	File TRC and Form 10F before the record date
USA	25% for an individual (the 15% is corporate-only)	No	Accept the 20.8%; rely on Form 1116 credit
Canada	25% for an individual	No	Accept the 20.8%; rely on T2209 credit

The US line is where people lose money to wishful reading. The often-quoted 15% US treaty rate applies only to a corporate shareholder holding at least 10% of the voting stock. Every individual portfolio investor, regardless of how large the stake, falls in the 25% band under Article 10. So for a US-resident individual the domestic 20% is the beneficial rate, full stop, and filing Form 10F buys nothing on the Indian side. Canada is structurally identical at 25% for an individual. A UK or UAE resident, by contrast, has a genuine 10% treaty rate and should always do the paperwork.

To claim the treaty rate where it helps, you give the company or its registrar, before the record date, three documents:

1. A valid Tax Residency Certificate (TRC) from your country of residence covering the relevant financial year. It is valid for one financial year only and must be renewed annually.
2. An electronically filed Form 10F, generated on the Indian income tax e-filing portal. Since 2022 this must be filed online, not hand-signed, and you need a PAN to do it.
3. A declaration of beneficial ownership and no permanent establishment in India, on the company's format.

With these in hand the payer withholds at the treaty rate, and crucially no surcharge and no cess are added on top of a treaty rate. The treaty rate is the all-in number, which is why 10% on a treaty basis beats not just the 20% base but the full 20.8% to 23.92% domestic stack. For the documents, formats and timing in detail, see DTAA mechanics: TRC and Form 10F and DTAA relief for NRIs.

Put the UK case in rupees. Priya lives in London and holds Rs 20 lakh of an Indian listed company that declares a Rs 1,00,000 dividend for FY 2025-26. Her total India income, including this and some NRO interest, is Rs 6 lakh, well below any surcharge threshold. If she does nothing, the company deducts 20% (Rs 20,000) plus 4% cess on that (Rs 800), so Rs 20,800 is withheld and Rs 79,200 reaches her NRO account. If instead she files Form 10F with a valid UK TRC before the record date, the India-UK treaty caps the rate at 10% with no surcharge or cess, so Rs 10,000 is withheld and Rs 90,000 lands. The paperwork saved her Rs 10,800 of upfront withholding on one dividend, and as the return below shows, most of that gap is not merely a timing difference.

On your return, the TDS is a prepayment, not the final tax

Whatever the company withheld is not your final tax. It is a prepayment to be settled when you file.

An NRI files ITR-2. The dividend enters the computation as income from other sources and is taxed at your slab rates as part of total India income. Note that the Section 87A rebate is for residents only, so an NRI cannot use it to zero out small dividend income the way a resident can. Against the tax computed, you take credit for the TDS the company deducted, which appears in your Form 26AS and Annual Information Statement (AIS). If the TDS exceeds your actual tax, the difference is refunded. If you furnished a treaty rate below your slab rate, you may owe a small balance on filing.

Continue Priya's numbers. Her total India income is Rs 6 lakh, and the slice of slab tax fairly attributable to the Rs 1,00,000 dividend is modest, say roughly Rs 5,000. In the do-nothing case she paid Rs 20,800 of TDS against that Rs 5,000 liability, so she recovers about Rs 15,800 as part of her overall refund, months after filing. With Form 10F she paid Rs 10,000 against the same Rs 5,000, a smaller Rs 5,000 to recover. Either route reaches the same final India tax. The difference is how much of her money the department holds through the year, and, the part that matters most, what the UK will credit. She reports the dividend on the SA106 foreign pages and claims Foreign Tax Credit Relief capped at the 10% treaty rate. With Form 10F, the India tax and the UK credit line up at 10% and nothing is wasted. Without it, the UK credits only 10%; the Indian withholding above 10% is not creditable in the UK and is recoverable only from India through her ITR. That stranded slice is the real cost of skipping the form, beyond the timing.

Reconcile before you file. The single most common cause of a held-up refund is a mismatch between the TDS you claim and what shows in Form 26AS and the AIS. See Form 26AS and AIS for NRIs and TDS for NRIs and refunds for reading these and running the refund end to end.

Foreign tax credit at home, and why the US case inverts the advice

The dividend is taxed in principle twice: once in India as the source country, once in your country of residence on worldwide income. The treaty stops you paying full tax in both, through foreign tax credit (FTC): your home country credits the Indian tax, limited to the treaty rate.

A US resident reports the Indian dividend on the federal return and claims the Indian tax on Form 1116, limited to the 25% treaty rate. Because the domestic withholding of 20.8% to 23.92% sits below that 25% cap, essentially all of it is creditable, which is exactly why there is no rate to chase in India. A UK resident claims Foreign Tax Credit Relief on SA106, capped at 10%, so any Indian withholding above 10% must come back from India, not HMRC. A Canadian resident claims the federal foreign tax credit on Form T2209, converting to Canadian dollars, capped at the 25% individual treaty rate. A UAE resident has no personal income tax and so nothing to credit, which is precisely why getting the Indian rate down to 10% matters most for a Gulf resident: the Indian tax is their entire, final, uncreditable cost.

The principle that ties it together: your home country credits only up to the treaty rate. Anything India withheld above that rate is not creditable abroad and has to be recovered from India by filing ITR-2. That is the whole argument for furnishing the TRC and Form 10F in advance wherever the treaty rate is below 20%, and the reason the same argument simply does not arise for a US or Canada individual. For the Indian-side Form 67 NRIs sometimes need, see foreign tax credit and Form 67.

Set the US numbers next to the UK ones to see the inversion. Arjun lives in New Jersey and in FY 2025-26 his Indian companies pay him Rs 12,00,000 of dividends, while his total India income, including capital gains, is Rs 1.5 crore, putting him in the 15% surcharge band. The individual US treaty rate is 25%, above domestic, so he uses the domestic 20% and there is no Form 10F to file for rate relief. Surcharge applies but is capped at 15% on the dividend: base 20% is Rs 2,40,000, surcharge at 15% on that is Rs 36,000, the subtotal is Rs 2,76,000, and 4% cess on the subtotal is Rs 11,040, so Rs 2,87,040 is withheld and Rs 9,12,960 reaches him. That all-in rate, Rs 2,87,040 on Rs 12,00,000, is about 23.92%, the worst case the cap permits; without the dividend surcharge cap his other income would have dragged the surcharge higher. On his US return he claims the full Rs 2,87,040 on Form 1116, comfortably inside the 25% limit, so none of it strands. Arjun's planning lesson is the mirror image of Priya's: there is no Indian rate to chase, so his effort goes into clean Form 1116 documentation and matching India's April-to-March year to the US calendar year, not into Form 10F.

Where the dividend lands: the NRO repatriation wrinkle

Dividends are paid into the bank account linked to your demat. For most NRIs investing on a non-repatriable basis or holding legacy shares from their resident days, that is an NRO account. Two consequences follow. Money in NRO is repatriable only up to USD 1 million per financial year, pooled across all outward remittances, and moving it needs Form 15CA and often Form 15CB, so a dividend credited to NRO is not freely sendable abroad the way an NRE credit is. And while the dividend itself carries no second NRO-level TDS (the Section 195 deduction already happened at the company), any interest the idle dividend cash earns in the NRO account is itself fully taxable and separately withheld. See tax on NRO interest, NRE, NRO and FCNR accounts, and reduce NRO TDS using DTAA. If you bought your shares as an NRI through the Portfolio Investment Scheme on a repatriable basis, the dividends can route to an NRE account and remit freely; buying Indian stocks via PIS covers which route puts dividends where.

Mutual fund IDCW: a different section, and a treaty question that is genuinely open

Equity and debt funds pay out under the label IDCW (Income Distribution cum Capital Withdrawal), the rebrand of the old dividend option. The tax in your hands is the same as a company dividend: added to total income, taxed at slab rates on your return. Two things differ, and one of them is unsettled in a way that affects what you can actually claim.

The withholding section is different. IDCW paid by a mutual fund to a non-resident is deducted under Section 196A, not Section 195, at the lower of 20% or the treaty rate, plus surcharge and cess, provided you furnish a valid TRC. The proviso allowing the fund to apply the treaty rate at withholding has applied from April 1, 2025. Mechanically it looks like a company dividend, a fifth or so withheld before you see the money, but it sits under its own provision with its own paperwork at the registrar.

The honest uncertainty is whether the treaty rate even applies. A mutual fund unit is not a share in a company, and the dividend article of most treaties (Article 10) defines dividends as income from shares. A strong technical view, and the one most fund houses take, is that an IDCW distribution does not fall within the treaty's dividend article at all, so there is no treaty rate to claim and the domestic 20% plus surcharge and cess stands regardless of your TRC. The Section 196A proviso lets a fund apply a treaty rate, but it does not resolve whether a treaty rate exists for this kind of income, so many registrars withhold at 20% no matter what you furnish, and that is a defensible position on their part, not an error. The position is unsettled; do not assume the treaty rate on IDCW the way you can on a company dividend.

The practical takeaway is cleaner than the law. If you are choosing between a fund's growth option and its IDCW option, the growth option is almost always the better NRI choice: no annual Section 196A withholding, no contested treaty question, no yearly return entry for the payout, and the gain is taxed as capital gains only when you redeem, often at a lower effective rate. We cover that side in capital gains tax for NRIs on shares and mutual funds and the KYC mechanics in NRI mutual fund eligibility.

Edge cases

Joint holdings. If shares are held jointly, the dividend and its TDS are generally attributed to the first holder. If the first holder is the NRI and the second is a resident spouse, the dividend is treated as the NRI's and withheld under Section 195. Get the holding order right before you rely on a particular treatment.

A dividend received after you became an NRI, on shares bought as a resident. The character of the income follows your residential status in the year of receipt, not when you bought the shares. A dividend paid while you are an NRI is taxed and withheld as an NRI's dividend, even on legacy resident-era shares. Re-designate the demat and the linked bank account promptly; holding Indian equities in a resident account after you become an NRI is a compliance problem in its own right. See NRI residency and RNOR rules.

RNOR years. In the transitional Resident but Not Ordinarily Resident phase, Indian dividends are still Indian-source income and remain fully taxable in India regardless of RNOR status. RNOR shelters certain foreign income, not Indian dividends.

A lapsed TRC. A TRC is valid for one financial year. Last year's certificate does not carry into a new year, and a dividend paid against a lapsed TRC reverts to 20% plus surcharge and cess. Diarise the renewal against your largest holdings' usual record dates.

Buyback instead of dividend. Since October 1, 2024, share buyback proceeds are taxed as a deemed dividend in the shareholder's hands rather than under the old company-level buyback tax. If a company you hold runs a buyback, treat the proceeds as dividend income for tax, with the same Section 195 withholding logic, not as a capital gain.

The honest read

For a UK or UAE resident, the dividend treaty rate is a real saving and you should always file the TRC and Form 10F before the record date. Ten percent against 20.8% is half the withholding, and the half above the treaty rate is not even creditable back home, so skipping the paperwork costs you twice. This is the single highest-return ten minutes in your Indian investing year, not optional housekeeping.

For a US or Canada resident, stop chasing a rate that does not exist. The individual treaty rate is 25%, above the domestic 20%, so you accept the domestic deduction, declare the dividend on ITR-2, and lean on your home-country credit (Form 1116 or T2209) to neutralise the second layer. Your effort belongs in clean documentation, not Form 10F.

For everyone, the broader framing is that dividends are a tax-inefficient way to own Indian equity as an NRI. Every payout triggers withholding, a return obligation, and an FTC reconciliation, and on IDCW you inherit a treaty question nobody can answer cleanly. Growth-option funds and shares held for appreciation defer all of it to a single redemption taxed as capital gains, usually lower and far less administratively heavy. If you are building a long-term India corpus and do not need the cash flow, favour growth over income, and keep dividend-paying holdings to the slice of the portfolio where you genuinely want the distribution. On Indian dividends for NRIs, the tax tail is heavier than most people assume, and the cheapest move is often to not invite the tail at all.

Related guides

• NRI ITR filing for AY 2026-27
• DTAA mechanics: TRC and Form 10F
• DTAA relief for NRIs
• TDS for NRIs and refunds
• Foreign tax credit and Form 67
• Capital gains tax for NRIs on shares and mutual funds
• Tax on NRO interest
• Form 26AS and AIS for NRIs
• NRI residency and RNOR rules
• NRE, NRO and FCNR accounts
• Reduce NRO TDS using DTAA
• NRI mutual fund eligibility
• Buying Indian stocks via PIS
• All Taxation guides

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This guide is general information, not tax advice. Tax treatment depends on your residential status, your country of residence, your specific treaty, and your full income picture, and the rules around mutual fund IDCW treaty claims are genuinely unsettled. Rates and provisions cited are for AY 2026-27 and were current as of June 2026. Confirm your position with a qualified chartered accountant or cross-border tax adviser before filing or relying on a treaty rate.