Dividends are taxable in my hands again. What can I actually deduct against dividend income, and is there a limit?
Only interest expense, and not more than twenty per cent of the dividend income included in your total income for that year computed without this deduction. The proviso to s.57 was inserted by the Finance Act 2020 with effect from 1 April 2021, so it applies from AY 2021-22 onwards; the same amendment substituted the word 'dividends' in clause (i) for 'dividends, other than dividends referred to in section 115-O', which is what brought ordinary dividends back into the shareholder's assessment.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2021-04-01, reported as Finance Act, 2020 (Act No. 12 of 2020), section 30, w.e.f. 1 April 2021; second proviso and the amendment to clause (i) w.e.f. 1 October 2024. It bears on section 57, section 57(i), section 56, section 2(22)(f), section 10(23D), section 10(35), section 115-O, section 10(34) of the Income Tax Act 1961, in Deductions & Disallowances, How Tax Law Is Read and Assessment & Scrutiny matters.
This is new law for every shareholder and it bites in three ways that are easy to miss. First, it is not merely a cap: it is an exclusion of everything except interest, so collection charges, demat charges, portfolio management fees and administrative expenditure against dividend income are gone altogether, even though clause (i) itself still speaks of a reasonable sum paid as commission or remuneration to a banker for realising the dividend. Second, the cap applies to units of a s.10(23D) Mutual Fund and units of a specified company defined in the Explanation to s.10(35) as well as to dividends. Third, the base for the twenty per cent is the dividend income 'included in the total income for that year, without deduction under this section' — that is, gross dividend, not net. Separately, a second proviso inserted by the Finance (No. 2) Act 2024 with effect from 1 October 2024 denies any deduction at all against dividend income of the nature referred to in s.2(22)(f), the buy-back deemed dividend, and clause (i) itself was amended from the same date to carve that out.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 57 opens with the words 'The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely :—'. Clause (i) as it now stands reads: 'in the case of dividends, (other than that referred in sub-clause (f) of clause (22) of section 2) or interest on securities, any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee'. The words in parentheses were inserted by Act No. 15 of 2024 with effect from 1 October 2024, and before the Finance Act 2020 clause (i) opened with the words 'dividends, other than dividends referred to in section 115-O'. Section 30 of the Finance Act 2020 substituted the single word 'dividends' for those words and inserted the first proviso, both with effect from 1 April 2021. A second proviso, inserted by Act No. 15 of 2024 with effect from 1 October 2024, reads: 'Provided further that no deduction shall be allowed in case of dividend income of the nature referred to in sub-clause (f) of clause (22) of section 2.'
Statutory position — no holding is asserted; this entry reproduces statutory text. From AY 2021-22 no deduction is allowable from dividend income, or from income in respect of units of a Mutual Fund specified under s.10(23D) or units of a specified company defined in the Explanation to s.10(35), other than a deduction on account of interest expense; and in any previous year that deduction cannot exceed twenty per cent of the dividend income or income in respect of such units included in the total income for that year computed without deduction under section 57. From 1 October 2024 no deduction at all is allowable against dividend income of the nature referred to in s.2(22)(f).
The Finance Act 2020 abolished the dividend distribution tax regime and restored the taxation of dividends in the shareholder's hands. The corresponding change to s.57 does two things in one stroke: it removes the words that had excluded s.115-O dividends from clause (i), so that ordinary dividends are once again within the computation, and it then confines what may be set against that income. The proviso is drafted as an exclusion followed by a ceiling — 'other than deduction on account of interest expense' removes every head of expenditure except interest, and 'such deduction shall not exceed twenty per cent' then caps what survives. The base of the cap is defined so as to prevent circularity: it is the dividend income included in the total income for that year 'without deduction under this section'.
Provided that no deduction shall be allowed from the dividend income, or income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or income in respect of units from a specified company defined in the Explanation to clause (35) of section 10, other than deduction on account of interest expense, and in any previous year such deduction shall not exceed twenty per cent of the dividend income, or income in respect of such units, included in the total income for that year, without deduction under this section
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Handle my notice → Ask a CA on WhatsAppOnly interest expense, and not more than twenty per cent of the dividend income included in your total income for that year computed without this deduction. The proviso to s.57 was inserted by the Finance Act 2020 with effect from 1 April 2021, so it applies from AY 2021-22 onwards; the same amendment substituted the word 'dividends' in clause (i) for 'dividends, other than dividends referred to in section 115-O', which is what brought ordinary dividends back into the shareholder's assessment. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 57, section 57(i), section 56, section 2(22)(f), section 10(23D), section 10(35), section 115-O, section 10(34) of the Income Tax Act 1961. It is reported as Finance Act, 2020 (Act No. 12 of 2020), section 30, w.e.f. 1 April 2021; second proviso and the amendment to clause (i) w.e.f. 1 October 2024. This is new law for every shareholder and it bites in three ways that are easy to miss. First, it is not merely a cap: it is an exclusion of everything except interest, so collection charges, demat charges, portfolio management fees and administrative expenditure against dividend income are gone altogether, even though clause (i) itself still speaks of a reasonable sum paid as commission or remuneration to a banker for realising the dividend. Second, the cap applies to units of a s.10(23D) Mutual Fund and units of a specified company defined in the Explanation to s.10(35) as well as to dividends. Third, the base for the twenty per cent is the dividend income 'included in the total income for that year, without deduction under this section' — that is, gross dividend, not net. Separately, a second proviso inserted by the Finance (No. 2) Act 2024 with effect from 1 October 2024 denies any deduction at all against dividend income of the nature referred to in s.2(22)(f), the buy-back deemed dividend, and clause (i) itself was amended from the same date to carve that out. If it applies to you, the first step is this: Compute the cap on gross dividend for the year — the twenty per cent is of the dividend income included in total income before any s.57 deduction — and restrict the interest claim to that figure.
Section 57 opens with the words 'The income chargeable under the head "Income from other sources" shall be computed after making the following deductions, namely :—'. Clause (i) as it now stands reads: 'in the case of dividends, (other than that referred in sub-clause (f) of clause (22) of section 2) or interest on securities, any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee'. The words in parentheses were inserted by Act No. 15 of 2024 with effect from 1 October 2024, and before the Finance Act 2020 clause (i) opened with the words 'dividends, other than dividends referred to in section 115-O'. Section 30 of the Finance Act 2020 substituted the single word 'dividends' for those words and inserted the first proviso, both with effect from 1 April 2021. A second proviso, inserted by Act No. 15 of 2024 with effect from 1 October 2024, reads: 'Provided further that no deduction shall be allowed in case of dividend income of the nature referred to in sub-clause (f) of clause (22) of section 2.' The matter was decided on 2021-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Statutory position — no holding is asserted; this entry reproduces statutory text. From AY 2021-22 no deduction is allowable from dividend income, or from income in respect of units of a Mutual Fund specified under s.10(23D) or units of a specified company defined in the Explanation to s.10(35), other than a deduction on account of interest expense; and in any previous year that deduction cannot exceed twenty per cent of the dividend income or income in respect of such units included in the total income for that year computed without deduction under section 57. From 1 October 2024 no deduction at all is allowable against dividend income of the nature referred to in s.2(22)(f).
The Finance Act 2020 abolished the dividend distribution tax regime and restored the taxation of dividends in the shareholder's hands. The corresponding change to s.57 does two things in one stroke: it removes the words that had excluded s.115-O dividends from clause (i), so that ordinary dividends are once again within the computation, and it then confines what may be set against that income. The proviso is drafted as an exclusion followed by a ceiling — 'other than deduction on account of interest expense' removes every head of expenditure except interest, and 'such deduction shall not exceed twenty per cent' then caps what survives. The base of the cap is defined so as to prevent circularity: it is the dividend income included in the total income for that year 'without deduction under this section'. In the words reproduced by the source cited on this page: "Provided that no deduction shall be allowed from the dividend income, or income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or income in respect of units from a specified company defined in the Explanation to clause (35) of section 10, other than deduction on account of interest expense, and in any previous year such deduction shall not exceed twenty per cent of the dividend income, or income in respect of such units, included in the total income for that year, without deduction under this section"
It was decided by the CBDT Circulars & Instructions on 2021-04-01 and is reported as Finance Act, 2020 (Act No. 12 of 2020), section 30, w.e.f. 1 April 2021; second proviso and the amendment to clause (i) w.e.f. 1 October 2024. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 57, section 57(i), section 56, section 2(22)(f), section 10(23D), section 10(35), section 115-O, section 10(34), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Statutory position — no holding is asserted; this entry reproduces statutory text. From AY 2021-22 no deduction is allowable from dividend income, or from income in respect of units of a Mutual Fund specified under s.10(23D) or units of a specified company defined in the Explanation to s.10(35), other than a deduction on account of interest expense; and in any previous year that deduction cannot exceed twenty per cent of the dividend income or income in respect of such units included in the total income for that year computed without deduction under section 57. From 1 October 2024 no deduction at all is allowable against dividend income of the nature referred to in s.2(22)(f). It arises in Deductions & Disallowances, How Tax Law Is Read and Assessment & Scrutiny matters, on section 57, section 57(i), section 56, section 2(22)(f), section 10(23D), section 10(35), section 115-O, section 10(34) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Drop every non-interest item from the dividend computation: demat and custody charges, portfolio management fees, collection charges and administrative costs are not deductible after the proviso, whatever clause (i) says. Do not carry the disallowed excess interest forward; the proviso caps the deduction for the previous year and contains no carry-forward, so a leveraged portfolio permanently loses the excess. For a buy-back on or after 1 October 2024, treat the consideration as a s.2(22)(f) dividend and claim nothing against it — the second proviso denies any deduction, so the cost of the shares is not available here and must be dealt with under the capital-gains provisions. For years up to AY 2020-21 the proviso does not exist; check the year on the notice before applying it, and remember that until then dividends distributed by a domestic company were generally exempt under s.10(34) with s.115-O. Where interest was borrowed for shares held as stock-in-trade or in the course of business, consider whether the income falls under s.28 at all, because the proviso operates only on income computed under s.56.
Still good law. The current text is taken from section 57 under its own heading and Act name, and the commencement is corroborated independently against the enacted text of section 30 of the Finance Act, 2020. Section 57 has been checked in four editions spanning 2019 to 2025 and the latest is the one relied on. No judicial decision construing the proviso is recorded, so nothing is stated about how the cap will be applied where interest is common to dividend and other income — which is the obvious battleground, because the cap is on the deduction and not on the expenditure, and apportionment is left to be worked out. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This is a statutory entry, not a decision: it asserts no bench and no holding, and decided_on is the date the first proviso and the substitution in clause (i) take effect, 1 April 2021, not the date of any decision. The current text is taken from section 57 of the Income-tax Act, 1961 under the heading 'Deductions', and cross-checked against an earlier edition whose footnotes attribute both the substitution in clause (i) and the insertion of the proviso to 'Act No. 12 of 2020, w.e.f. 1-4-2021', and against an edition earlier still in which section 57 carries no proviso at all. The amending words were then read independently in the text of section 30 of the Finance Act, 2020 as enacted, which reads 'In section 57 of the Income-tax Act, with effect from the 1st day of April, 2021'. The Finance Act text prints 'twenty per cent.' with a full stop in the legislative style; the Act's own consolidated text prints 'twenty per cent'. The second proviso, and the words in clause (i) excluding s.2(22)(f) dividends, carry footnotes attributing them to 'Act No. 15 of 2024, w.e.f. 1-10-2024'. That Act number is the same one attributed to the s.2(22)(f) buy-back amendments, and this library already carries an entry dating that regime to 1 October 2024. No judicial decision applying the twenty per cent cap is recorded; the only orders that quote the current text of s.57 are deciding years before AY 2021-22, when the cap did not apply. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Statutory position — no holding is asserted; this entry reproduces statutory text. From AY 2021-22 no deduction is allowable from dividend income, or from income in respect of units of a Mutual Fund specified under s.10(23D) or units of a specified company defined in the Explanation to s.10(35), other than a deduction on account of interest expense; and in any previous year that deduction cannot exceed twenty per cent of the dividend income or income in respect of such units included in the total income for that year computed without deduction under section 57. From 1 October 2024 no deduction at all is allowable against dividend income of the nature referred to in s.2(22)(f).
TaxSphere, “Statutory position — the proviso to s.57: only interest, capped at twenty per cent of the dividend, from AY 2021-22”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-section-57-i-proviso-twenty-per-cent-cap-on-deduction-against-dividend/ (validity last checked 2026-09-08)
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