No. Dividends are only one part of what shareholders earn; the other, and usually larger, part is capital gains from a rising share price. Together they make up total return, and over long periods most of an Indian equity investor’s wealth has come from price growth rather than dividends.
This article explains total return, how dividends and buybacks are taxed in India in 2026, why bonus issues and splits do not make you richer, and how to draw an income from shares without selling them outright, including the risks of borrowing against your portfolio.
Total return: capital gains plus dividends
Total return is the change in a share’s price plus any dividends received, expressed as a percentage of what you paid. If you buy a share at ₹500, it rises to ₹560 and pays a ₹10 dividend during the year, your total return is (₹60 + ₹10) ÷ ₹500 = 14%. Only ₹10 of that, or 2 percentage points, came from the dividend.
Index data shows the same pattern. Since its launch in November 1995, the Nifty 50 price index has compounded at 10.61% a year, while the Nifty 50 Total Return Index, which assumes dividends are reinvested, has compounded at 12.12% (NSE Indices factsheet, as of September 2026). Dividends added about 1.5 percentage points a year; price growth did the rest.
That 1.5 points still matters. Compounded over 30 years, it is the difference between a portfolio growing roughly 21 times and roughly 31 times. Dividends are valuable; they are just not the whole story.
Five ways shareholders get money from a company
| Route | Do you have to sell? | Creates value? | How it is taxed (resident individual, 2026) |
|---|---|---|---|
| Capital gains | Yes, to realise them | Yes, if the business grows | Held over 12 months: 12.5% above ₹1.25 lakh a year. Up to 12 months: 20% |
| Dividends | No | Pays out profits already earned | Added to income, taxed at your slab rate |
| Buybacks | Only if you tender shares | Can help if bought below fair value | From 1 April 2026: capital gains on the profit (promoters pay more) |
| Bonus issues and splits | No | No, more shares at a lower price | No tax on receipt; affects cost and holding period for later sale |
| Loan against shares | No, shares are pledged | No, it is borrowing | Not income; interest is a cost |
How dividends are taxed in India
Since the Finance Act 2020 abolished dividend distribution tax, dividends received from 1 April 2020 (FY 2020-21 onwards) are taxable in the shareholder’s hands at their income-tax slab rate. Earlier, companies paid the tax and most individual shareholders received dividends tax-free. For someone in the 30% slab, a ₹10,000 dividend now leaves about ₹7,000 after tax, before cess.
TDS on dividends
Companies and mutual funds deduct tax at source (TDS) at 10% on dividends paid to a resident individual if the total from that payer in a financial year exceeds a threshold. Budget 2025 raised the threshold from ₹5,000 to ₹10,000 from FY 2025-26, and the new Income-tax Act, 2025, which took effect on 1 April 2026, keeps the ₹10,000 limit. If you have not linked your PAN, TDS is 20%.
TDS is not the final tax. It is credited against your liability when you file your return, so someone in the 30% slab still owes the difference, and someone below the taxable limit can claim a refund or file Form 15G or 15H in advance. Dividends below ₹10,000 from a company escape TDS, but they are still taxable income.
No interest deduction from 2026
Until March 2026, investors who borrowed to buy shares could deduct interest against dividend income, capped at 20% of the dividend. Budget 2026 removed this deduction from 1 April 2026, so dividends are now taxed in full regardless of any borrowing cost.
Buybacks: what changed in 2024 and again in 2026
In a buyback, a company uses cash to purchase its own shares, usually at a premium to the market price. Shareholders who tender get cash; those who don’t end up owning a slightly bigger slice of the company. The tax treatment has changed twice in two years:
- Before 1 October 2024: the company paid buyback tax (about 23.3% including surcharge and cess) and the proceeds were tax-free for shareholders.
- 1 October 2024 to 31 March 2026: the entire buyback amount was treated as a deemed dividend and taxed at the shareholder’s slab rate. The cost of the shares was treated as a separate capital loss, usable only against capital gains. A 30% slab investor could pay tax on money that was largely their own capital coming back.
- From 1 April 2026 (tax year 2026-27): Budget 2026 moved buybacks back under capital gains for all shareholders. You are taxed only on the profit (buyback price minus your cost) at normal capital gains rates. Promoters pay an additional buyback tax, bringing their effective rate to 22% for promoter companies and 30% for other promoters.
For a minority shareholder, the 2026 rules make tendering in a buyback far more tax-efficient than in the 2024-26 window. Suppose you tender shares bought for ₹80,000 at a buyback price that pays you ₹1,00,000, having held them over a year. Under the 2024-26 rules, ₹1,00,000 was taxable at your slab. Under the current rules, only the ₹20,000 gain is long-term capital gain, and it falls within the ₹1.25 lakh exemption if you have no other gains that year.
Bonus issues and splits create no value
A bonus issue gives you free extra shares; a split divides each share into several smaller ones. In both cases the company itself is unchanged, so the share price adjusts down in proportion and your holding is worth the same.
Suppose you own 100 shares at ₹1,000 each, worth ₹1,00,000. After a 1:1 bonus you own 200 shares, and the price adjusts to about ₹500: still ₹1,00,000. After a split from ₹10 face value to ₹2, you would own 500 shares at about ₹200: again ₹1,00,000. Prices may move afterwards because of sentiment or better liquidity, but the corporate action itself adds nothing.
Tax follows the same logic. Bonus shares have a cost of zero and their holding period starts from allotment, so selling them within 12 months is taxed as a short-term gain on the full sale price. Split shares carry over your original cost and purchase date.
Worked example: high-yield vs high-growth over 10 years
Consider two hypothetical stocks, each bought for ₹1,00,000 and held for 10 years. Dividends are taken as cash, not reinvested, and the investor is in the 30% slab (cess ignored for simplicity).
- Stock A (high yield): pays 6% of its start-of-year price as a dividend; the price grows 3% a year. Total return about 9% a year.
- Stock B (high growth): pays 1% of its start-of-year price; the price grows 13% a year. Total return about 14% a year.
| After 10 years | Stock A (high yield) | Stock B (high growth) |
|---|---|---|
| Share value | ₹1,34,392 (₹1,00,000 × 1.03^10) | ₹3,39,457 (₹1,00,000 × 1.13^10) |
| Dividends received | ₹68,783 (₹6,000 rising to ₹7,829) | ₹18,420 (₹1,000 rising to ₹2,773) |
| Tax on dividends at 30% | ₹20,635 | ₹5,526 |
| Dividends after tax | ₹48,148 | ₹12,894 |
| LTCG tax if sold in year 10 | Nil (₹34,392 gain is under ₹1.25 lakh) | ₹14,307 (12.5% × [₹2,39,457 − ₹1,25,000]) |
| Total wealth after all tax | ₹1,82,540 | ₹3,38,044 |
Working for dividends: Stock A’s yearly dividend is ₹6,000 × 1.03^(year − 1), so the 10-year total is ₹6,000 × (1.03^10 − 1) ÷ 0.03 = ₹68,783. For Stock B it is ₹1,000 × (1.13^10 − 1) ÷ 0.13 = ₹18,420.
Stock A paid almost four times as much in dividends, but Stock B left the investor about ₹1.56 lakh better off. Its gains were also taxed only once, at sale, and at a lower rate than slab-rate dividends. The lesson is not that dividend stocks are bad; a high-yield stock whose price also grows well can be an excellent holding. It is that yield alone is the wrong yardstick. Judge any stock on total return, and check whether a very high yield reflects a falling share price or a payout the business cannot sustain. Our list of dividend stocks worth researching covers how to check that.
Making money without selling your shares
Many investors want income from their portfolio without giving up the shares. Dividends and buybacks are the company’s choice, not yours. If you need a predictable cash flow, two other routes exist.
Borrowing against shares (loan against securities)
Banks and NBFCs let you pledge shares or mutual fund units for a loan or overdraft, known as a loan against securities (LAS). You keep ownership and any dividends, but the lender lends only a fraction of the market value, called the loan-to-value (LTV) ratio. RBI raised the ceiling on bank loans against shares to ₹1 crore per individual in its October 2025 policy.
The risk is the margin call. Suppose Kavya pledges shares worth ₹10 lakh and borrows ₹5 lakh, a 50% LTV. If the market falls 30%, her shares are worth ₹7 lakh and the lender will now lend only ₹3.5 lakh against them. She must repay ₹1.5 lakh or pledge more within days; otherwise the lender sells her shares at the low price. The Nifty 50 fell 12.61% in the first nine months of 2026 alone (NSE Indices, as of September 2026), so this is not a remote scenario.
Cost is the other problem. At an assumed 10.5% interest rate, Kavya pays ₹52,500 a year, while a portfolio yielding around 1.2% would pay her about ₹12,000 in dividends, which are now taxed in full with no interest deduction. LAS can make sense as short-term bridge finance; as a way to fund living costs it usually destroys wealth.
SWP: a self-made dividend from mutual funds
A systematic withdrawal plan (SWP) redeems a fixed amount from a mutual fund every month. You choose the amount and the date, unlike a dividend. It works like a self-made dividend, and the tax is often lower because only the gain portion of each withdrawal is taxed, not the whole amount.
Suppose Mr Iyer, aged 62, holds ₹30 lakh in an equity-oriented hybrid fund whose NAV has doubled since he bought it, and withdraws ₹15,000 a month, or ₹1.8 lakh a year. Half of each withdrawal is his original capital and half is gain, so his taxable gain for the year is ₹90,000. Held more than 12 months, that is long-term and inside the ₹1.25 lakh exemption, so he pays no tax if he has no other equity gains that year. A ₹1.8 lakh dividend, by contrast, would be taxed fully at his slab rate.
SWPs have their own risk: withdrawing too much during a long fall eats into capital. Keeping the yearly withdrawal around 4% to 6% of the corpus and holding one to two years of withdrawals in a debt fund makes the plan more resilient. For the tax side of selling, see our guide on how to reduce capital gains tax on shares.
Risks and common mistakes
- Chasing yield. A 9% yield often means the share price has collapsed or the payout is about to be cut. Check payout ratio, debt and earnings trend.
- Buying just before the record date. The share price usually drops by roughly the dividend amount on the ex-date, and you then pay slab-rate tax on the dividend. You have converted capital into taxable income.
- Celebrating bonus and split announcements. They change the number of shares, not the value of the business.
- Ignoring tax drag in high slabs. For a 30% slab investor, a growth-oriented approach is usually more tax-efficient than a dividend-heavy one.
- Using leverage for income. Margin calls force sales at the worst moment.
- Concentration. Relying on two or three dividend payers exposes you to sector-specific cuts. Diversify, as covered in our guide to asset allocation.
A quick checklist for income-minded investors
- Judge every stock or fund on total return, not yield.
- Know your slab: dividends cost a 30% slab investor far more than a 5% slab investor.
- Link your PAN to avoid 20% TDS, and file Form 15G or 15H if your income is below the taxable limit.
- Consider tendering in buybacks under the post-April 2026 rules after comparing the buyback price with your cost.
- For regular income, compare an SWP’s tax with the tax on equivalent dividends.
- Borrow against shares only for short-term needs, and keep the loan well below the lender’s limit.
Wondering whether to collect dividends or reinvest them? Reinvesting turns them into extra units that compound, as explained in our article on the power of compounding.
Frequently asked questions
Can you make money from stocks without selling them?
Yes, through dividends, by tendering only part of your holding in a buyback, or by borrowing against the shares. Your wealth also grows on paper as prices rise. But to turn price gains into spendable cash you eventually need to sell, either directly or through an SWP in mutual funds.
Is dividend income tax-free in India?
No. Since FY 2020-21, dividends are added to your total income and taxed at your slab rate. TDS of 10% applies if dividends from one company or fund exceed ₹10,000 in a year, but you owe tax even on smaller amounts.
How is a share buyback taxed now?
For buybacks from 1 April 2026, shareholders pay capital gains tax on the difference between the buyback price and their cost: 12.5% above ₹1.25 lakh if held over 12 months, or 20% if held for less. Promoters face a higher effective rate of 22% or 30%. Between 1 October 2024 and 31 March 2026, the full amount was taxed as a dividend.
Do bonus shares increase my wealth?
No. The share price falls in proportion to the extra shares, so your holding is worth the same immediately after the bonus. Future dividends per share are usually adjusted too.
Is an SWP better than dividends for retirees?
Often, yes, for tax and control. Only the gain portion of each SWP withdrawal is taxed, at capital gains rates, while dividends are fully taxed at slab. The trade-off is that you must set a sustainable withdrawal rate yourself.
Ramesh Iyer is the pen name of the founder and editor of StocksInfo.AI, an independent investor in Indian equities, mutual funds and ETFs since 2020. Every article is researched from primary sources such as SEBI, AMFI, NSE and the Income Tax Department, and fact-checked before publishing. About us