Dividends in India: Record Date, Ex-Date, Yield and Tax Rules

What is a dividend and why do companies pay it?

A dividend is a distribution of a company's earnings to its shareholders, usually paid in cash per share owned. Companies with stable profits and surplus cash often reward shareholders through regular dividends. Dividend-paying stocks appeal to investors seeking steady income alongside potential capital appreciation. The board of directors declares the dividend amount, the record date and the payment date. Not all companies pay dividends; growth firms may reinvest profits into expansion instead.

What is the record date?

The record date is the cut-off date set by the company to determine which shareholders are entitled to receive the declared dividend. Only investors whose names appear in the company's register of members at the close of business on the record date will receive the dividend payment. Shares in India are held in dematerialised form with depositories, and the company freezes the shareholder list on the record date to prepare dividend payouts.

What is the ex-dividend date and how does T+1 settlement affect it?

The ex-dividend date (ex-date) is the first trading day on which a share trades without the dividend entitlement. Buyers purchasing on or after the ex-date do not receive the upcoming dividend; the seller retains that right. Historically, when settlement took two days (T+2), the ex-date was one trading day before the record date to allow the trade to settle in time. Under India's T+1 settlement cycle—introduced in January 2023—trades settle the next business day. Consequently, the ex-date now coincides with the record date itself. To be eligible for a dividend, an investor must buy the share at least one trading day before the ex-date so that the purchase settles on or before the record date.

How does the share price behave around the ex-date?

On the ex-date, the share price typically opens lower by approximately the dividend amount because new buyers will not receive that payment. This adjustment is a mechanical reflection of value leaving the company's books. For example, if a stock closed at Rs 100 and the dividend is Rs 5, the price may open near Rs 95 on the ex-date, all else being equal. Market forces, news and trading volumes can cause actual price movements to differ. Over time, strong fundamentals usually help the price recover, but short-term volatility around ex-dates is common.

What is dividend yield and how is it calculated?

Dividend yield expresses the annual dividend income as a percentage of the current share price, providing a simple way to compare income potential across different stocks. The formula is:

Dividend Yield (%) = (Annual Dividend per Share ÷ Current Market Price per Share) × 100

A higher yield may indicate better income generation, but it can also result from a falling share price. Investors should assess yield alongside the company's fundamentals, payout ratio and growth prospects. Dividend yield fluctuates as the market price changes, even if the dividend amount remains constant.

Stock B offers a higher yield but distributes a larger share of earnings, leaving less for reinvestment.

How are dividends taxed in India?

Dividends received by shareholders are taxed at the individual's slab rate under the Income-tax Act, 2025. This replaced the earlier dividend distribution tax regime where companies paid tax before distributing dividends. Now the full dividend is taxable in the investor's hands, and it must be reported under "Income from Other Sources" when filing returns.

Tax Deducted at Source (TDS): If the total dividend paid by a single company to a resident shareholder exceeds Rs 10,000 in a financial year, the company deducts TDS at 10 percent before crediting the dividend. This threshold was raised from Rs 5,000 on 1 April 2025. If the recipient has not linked their PAN or has not furnished it, TDS is deducted at 20 percent. The TDS amount is reflected in Form 26AS and can be claimed as a credit when filing the income-tax return. Investors in lower tax brackets or those with no taxable income can claim a refund of the TDS.

Worked example

Consider an investor tracking ITC shares around a hypothetical dividend announcement. ITC's board declares a dividend of Rs 6.50 per share and sets the record date as 21 October 2026. Under T+1 settlement, the ex-date is also 21 October 2026. To be eligible, the investor must buy the shares by 20 October 2026 at the latest, so that the trade settles on 21 October.

Using the real NSE daily closing prices:

• 16 October 2026: Close Rs 263.50
• 19 October 2026: Close Rs 260.80
• 21 October 2026 (record/ex-date): Close Rs 262.00
• 22 October 2026: Close Rs 258.90

The investor purchases 100 shares on 19 October at the closing price of Rs 260.80 per share, spending Rs 26,080. The trade settles on 21 October, so the investor's name appears on the register on the record date and qualifies for the dividend. The dividend entitlement is 100 shares × Rs 6.50 = Rs 650.

On 21 October the stock closed at Rs 262.00. On 22 October, the first day trading ex-dividend, the stock closed at Rs 258.90, a drop of Rs 3.10. While the dividend was Rs 6.50, the actual price movement reflects broader market conditions and trading activity. The investor receives Rs 650 as dividend income. If this is the only dividend from ITC during the year and the total is below Rs 10,000, no TDS is deducted. The Rs 650 is added to the investor's total income and taxed at the applicable slab rate when filing the annual return.

Common mistakes

One frequent error is buying shares on the ex-date itself, expecting to receive the dividend; under T+1 settlement that trade settles after the record date, and the buyer misses the payout. Another mistake is ignoring the tax implications: many investors assume dividends are tax-free and fail to report them, risking notices and interest. Relying solely on dividend yield without examining payout sustainability or earnings quality can lead to poor stock selection, especially if a high yield results from a declining share price rather than strong fundamentals. Finally, investors sometimes overlook TDS credits, either not claiming refunds when in a lower bracket or not accounting for TDS already deducted when calculating tax liability.