2026 Budget Alert: PSU Dividends Record High – How Much Will Tax Changes Hurt?

New Delhi, February 16, 2026: India's public sector giants are on a dividend-paying spree like never before, pumping massive cash back to shareholders amid strong profits and government directives. Yet, fresh changes from the Union Budget 2026 are reshaping how much you actually pocket from these payouts. With the Centre eyeing a staggering ₹3.2 lakh crore in dividends from RBI and PSUs for FY 2026-27 (up from ₹3.04 lakh crore revised for the current year), this is prime time for income-focused investors – if you understand the new tax landscape.
Dividend Taxation Essentials in 2026
Since the abolition of Dividend Distribution Tax in 2020, dividends from all companies – including PSUs – are taxed directly in shareholders' hands. These fall under "Income from Other Sources" and get added to your total income, taxed at your slab rates (up to 30% plus surcharge and 4% cess under the new regime).

TDS Rule: Companies deduct 10% TDS if your annual dividend exceeds ₹5,000 (threshold raised to ₹10,000 from April 2025 in prior updates, but confirm latest). You claim TDS credit while filing ITR.
No Special Breaks for PSUs: Domestic PSU dividends receive the same treatment as private ones – no exemptions or concessions for government-owned entities.
For NRIs: Standard TDS at 20%, potentially reduced via DTAA (often 10-15%). GDRs of PSUs bought in foreign currency enjoy a flat 10% rate.

Dividends boost non-tax revenue, helping the government maintain fiscal discipline amid global headwinds.
Key Budget 2026 Change: Goodbye to Interest Deduction
The big shift effective April 1, 2026 (FY 2026-27 onwards): No more deduction for interest paid on loans used to buy dividend-yielding shares or mutual funds. Previously, under Section 57, you could offset up to 20% of dividend income against such interest – a boon for leveraged investors or margin traders.
This removal simplifies taxation but raises effective tax liability for those borrowing to invest. "Leveraged plays on high-yield PSUs will feel the pinch," notes a Mumbai-based tax advisor. "Net returns drop as full dividend gets taxed without offset."
Other equity tweaks include buybacks now taxed as capital gains (not dividend), with promoters facing higher rates to curb misuse.
Why PSUs Are Dividend Powerhouses Right Now
Government guidelines push PSUs to distribute at least 30% of PAT or 5% of net worth (whichever higher), with banks allowed up to 35% if NPAs stay low. Recent announcements highlight the trend:

Coal India declared 55% interim dividend (₹5.50/share), record date mid-February.
Defence major HAL announced a massive 700% interim.
Oil India, Power Grid, and others rolled out strong interim payouts.

Sectors like energy (ONGC, GAIL), mining (NMDC), power (Power Grid), and banks (SBI, PNB) lead with yields often 5-8%+. These "Dividend Kings" offer reliable income in volatile markets, backed by record profits and policy support.
Smart Strategies for PSU Dividend Hunters

Monitor TDS & Form 26AS: Cross-check deductions to avoid ITR surprises.
Tax Regime Choice: New regime suits lower incomes (no deductions needed), but old regime may help if you have other offsets.
NRIs – Use DTAA: Submit forms for lower withholding.
Avoid Leverage Pitfall: Post-2026, rethink borrowed funds for dividend stocks – focus on unleveraged holdings for cleaner yields.
Diversify: Pair PSUs with tax-saving options like ELSS under 80C.

As PSU stocks surge on robust earnings, 2026 promises rich rewards for patient investors. But with the interest deduction gone, calculate post-tax yields carefully. "PSUs remain attractive for steady income," says an analyst, "just plan around the tax reality."
This piece draws from latest Budget 2026 provisions, Income Tax Act, and market updates. Tax rules evolve – consult a professional or official sources for personalized advice."""