Income Deemed to Be Received and Dividend Deemed Income: Section 7, Income Tax Act 2025

Section 7 of the Income-tax Act, 2025 does two jobs. Sub-section (1) lists three items that are deemed to be received by an employee in a tax year even though the employee has not drawn the money: the taxable part of provident fund accretion, a transferred provident fund balance, and the employer's contribution to a Central Government notified pension scheme. Sub-section (2) fixes the tax year in which a dividend is taxed: the year it is declared, distributed or paid, and for an interim dividend, the year the money is unconditionally made available to the member.

This guide explains each limb with the exact clause, worked examples for tax year 2026-27 and the related provisions you need to read with it. Law is taken from the Act as amended by the Finance Act, 2026, effective 1 April 2026. It is information, not tax advice.

What does section 7 of the Income-tax Act, 2025 say?

The section is short. It does not create a new charge to tax. It decides when an amount counts as the assessee's income, and for the three items in sub-section (1), it treats them as received even without an actual payment to the employee.

Provision	What it deems	Detail lives in
Section 7(1)(a)	Annual accretion in the year to an employee's balance in a recognised provident fund is deemed received, to the extent provided	Schedule XI, Part A, paragraph 6
Section 7(1)(b)	Transferred balance in a recognised provident fund is deemed received, to the extent provided	Schedule XI, Part A, paragraph 11(4) and (5)
Section 7(1)(c)	Employer's contribution in the year to the employee's account under a pension scheme mentioned in section 124	Section 124
Section 7(2)(a)	Dividend is income of the tax year in which it is declared, distributed or paid	Section 2(40)(a) to (e)
Section 7(2)(b)	Interim dividend is income of the tax year in which it is unconditionally made available to the entitled member	Section 7(2)(b)

Which employer contributions are deemed to be received by the employee?

Section 7(1) names three. In each case the employee has not necessarily received cash, but the law treats the amount as received in that tax year.

1. Provident fund interest above the notified rate (section 7(1)(a)). Paragraph 6 of Part A of Schedule XI says the part of the annual accretion that consists of interest credited to a recognised provident fund balance, so far as it is allowed at a rate above the rate fixed by the Central Government by notification, is deemed received by the employee, included in total income for that year and liable to tax. The notified rate is not stated in the Act text, so check the current notification for the figure.
2. Transferred balance in a newly recognised fund (section 7(1)(b)). When a provident fund with existing balances gets recognition, paragraph 11(4) of Part A of Schedule XI requires the Assessing Officer to work out the aggregate of amounts in the transferred balance that would have been taxable if the Part had been in force since the fund began. That aggregate is deemed to be income received by the employee in the tax year in which recognition takes effect. Paragraph 11(5) allows the approving authority, in cases of serious accounting difficulty and subject to rules, to make a summary calculation of that aggregate.
3. Employer's contribution to the pension scheme (section 7(1)(c)). The contribution made by the Central Government or any other employer in the year to the employee's account under a pension scheme mentioned in section 124 is deemed received.

If the employer's pension contribution is deemed received, is it taxed?

It is brought into the employee's income first. Section 124(1) then allows a deduction for the whole of the employer's contribution up to a ceiling of the employee's salary in the tax year:

• 14% where the employer is the Central Government or a State Government (section 124(1)(a)); and
• 10% for any other employer (section 124(1)(b)). Under section 124(2), where total income is chargeable to tax under section 202(1), the 10% is read as 14%. Section 202(1) is the default rate computation, which applies unless the person exercises the option under section 202(4), so most private-sector employees fall under the 14% ceiling.

"Salary" here includes dearness allowance only if the terms of employment so provide, and excludes all other allowances and perquisites (section 124(13)(b)).

So the deemed-received rule and the deduction work as a pair. Anything the employer pays above the ceiling stays in income.

Worked example 1: employer pension contribution (tax year 2026-27)

Assumptions: the pension scheme is one notified by the Central Government under section 124. "Salary" is taken as Rs 6,00,000 for the tax year in both cases, and Meena has exercised the section 202(4) option, so the 10% ceiling applies to her (if section 202(1) applied, her ceiling would be 14%, as in section 124(2)). "Salary" is salary as defined in section 124(13)(b).

	Meena (private employer)	Ravi (State Government employee)
Salary for the tax year	Rs 6,00,000	Rs 6,00,000
Employer contribution, deemed received under section 7(1)(c)	Rs 72,000	Rs 72,000
Ceiling under section 124(1)	10% of 6,00,000 = Rs 60,000	14% of 6,00,000 = Rs 84,000
Deduction allowed (lower of contribution and ceiling)	Rs 60,000	Rs 72,000
Amount left in income	72,000 - 60,000 = Rs 12,000	72,000 - 72,000 = Nil

In which tax year is a dividend taxed?

Section 7(2)(a) answers this for any dividend declared by a company or distributed or paid by it within the meaning of section 2(40)(a) to (e). It is income of the tax year in which it is declared, distributed or paid, as the case may be. The tax year runs from 1 April to 31 March. The test is the event named in the clause, not the year in which the company earned the profit and not the year in which the shareholder spends the money.

Section 7(2)(b) handles interim dividends separately. An interim dividend is income of the tax year in which the company unconditionally makes the amount available to the member entitled to it. An interim dividend declared in March but made available only in April therefore falls in the later tax year.

What counts as a dividend for section 7(2)?

Section 2(40) defines "dividend" to include, among others, a distribution of accumulated profits that releases company assets to shareholders (clause (a)), a distribution of debentures or deposit certificates, and bonus shares to preference shareholders to the extent of accumulated profits (clause (b)), distributions on liquidation (clause (c)) and on capital reduction (clause (d)), and certain loans or payments by a closely held company (clause (e)). Section 7(2)(a) refers to clauses (a) to (e) of that definition. The Finance Act, 2026 substituted "(e)" for "(f)" in this reference with effect from 1 April 2026.

Clause (e) is the one that surprises people. A payment by a company in which the public are not substantially interested, as a loan or advance to a shareholder who is the beneficial owner of shares carrying at least 10% of voting power, to a concern in which that shareholder has a substantial interest, or made for the shareholder's individual benefit, is a dividend to the extent the company has accumulated profits. Section 2(40) excludes, among other things, loans made in the ordinary course of business where lending money is a substantial part of the company's business (exclusion (ii)).

Worked example 2: deemed dividend from a loan (tax year 2026-27)

Assumptions: Sharma Traders Pvt Ltd is a closely held company. Ravi holds 40% of its voting shares. The company lends him Rs 12,00,000 on 15 March 2027. Accumulated profits up to that date, including all profits to the date of payment, are Rs 7,50,000. The company's business is not lending money.

Step	Working	Result
1. Is the lender a company where the public are not substantially interested?	Closely held	Yes
2. Is the borrower a shareholder with at least 10% voting power?	40%	Yes
3. Dividend under section 2(40)(e)	Lower of loan 12,00,000 and accumulated profits 7,50,000	Rs 7,50,000
4. Tax year of income under section 7(2)(a)	Paid on 15 March 2027, which is within 1 April 2026 to 31 March 2027	2026-27

The balance of Rs 4,50,000 of the loan is not treated as dividend under this clause.

Worked example 3: declared in one year, paid in the next

Assumptions: a company declares a final dividend of Rs 8 per share on 20 March 2027 and pays it on 5 April 2027. Meena holds 2,500 shares.

1. Dividend = 2,500 x Rs 8 = Rs 20,000.
2. Section 7(2)(a) gives three triggers: declared, distributed or paid, "as the case may be". The Act text does not say which of these applies when they fall in different years, so check the facts and the date of each event before deciding the year for such a dividend, and take professional advice for large amounts.

What is not a deemed dividend, and what are "accumulated profits"?

Section 2(40) lists payments that are not dividends, even if they look like one:

• a liquidation or capital-reduction distribution on a share issued for full cash consideration, where the holder has no right to surplus assets on liquidation (exclusion (i));
• a loan or advance made in the ordinary course of business by a company whose substantial business is lending money (exclusion (ii));
• an actual dividend later paid by the company, to the extent it is set off against a sum earlier treated as a clause (e) dividend (exclusion (iii)), so the same money is not taxed twice;
• shares distributed by the resulting company to shareholders of the demerged company under a demerger (exclusion (iv)); and
• a loan between two group entities in the specific foreign-listed group situation described in exclusion (v), where the countries are notified by the Central Government.

"Accumulated profits" for clauses (a), (b), (d) and (e) include all profits of the company up to the date of the distribution or payment. For an amalgamated company, the accumulated profits of the amalgamating company on the date of amalgamation are added (section 2(40), explanation (A) and (B)).

Once a dividend is taxable, section 93(2) allows no deduction against dividend income (this wording applies from 1 April 2026), so expenses cannot be set off against it.

Real-life scenarios

Ravi's interim dividend. Ravi owns shares in a listed company. On 28 March 2027 the board announces an interim dividend, but the amount reaches his bank account on 9 April 2027. Under section 7(2)(b) it is income when it is unconditionally made available to him, so it belongs to tax year 2027-28, not 2026-27. His record of the credit date decides the year.

Meena's new employer. Meena joins a private company that contributes to her notified pension account every month. She never sees that money in her payslip as cash. Because of section 7(1)(c), the contributions are deemed received in each tax year, and section 124(1)(b) lets her deduct them up to 10% of her salary, or 14% if her total income is chargeable to tax under section 202(1) (section 124(2)).

Quick reference

Item	Trigger for the tax year	Limit or condition
PF interest above the notified rate	The tax year of the accretion	Notified rate is set by the Central Government
Transferred PF balance	Year recognition takes effect	Computed per Schedule XI, Part A, paragraph 11(4)
Employer pension contribution	The tax year of the contribution	Deduction up to 14% (Government employer) or 10% (other employer; 14% if section 202(1) applies) of salary, section 124(1) and (2)
Dividend	Declared, distributed or paid	Section 2(40)(a) to (e)
Interim dividend	Unconditionally made available to the member	Section 7(2)(b)

Common mistakes

• Treating employer pension contributions as invisible because they were never paid out. Section 7(1)(c) deems them received.
• Claiming the section 124(1) deduction on the full contribution without checking the 10% or 14% of salary ceiling, and without using the section 124(13)(b) meaning of salary.
• Putting an interim dividend in the year it was announced when the money was made available in the next year.
• Ignoring a loan from a closely held company to a 10% shareholder. Section 2(40)(e) can turn it into a dividend up to the accumulated profits.
• Assuming the provident fund interest rule has a fixed percentage in the Act. Paragraph 6 points to a rate fixed by notification, so use the notified figure.

Where this is in the Act

• Section 7(1)(a) to (c): income deemed to be received.
• Section 7(2)(a) and (b): timing of dividend and interim dividend.
• Section 2(40): definition of "dividend".
• Section 124: employer and employee contribution to the Central Government pension scheme.
• Schedule XI, Part A, paragraphs 6 and 11: recognised provident funds.
• For income that is deemed to accrue or arise in India, see our guide to income deemed to accrue or arise in India.

For a CA firm, the effort is tracking which clients have PF transfers, employer pension contributions or closely held company loans that need a year-by-year view. Finexo's practice management software helps you keep these client-wise tasks and deadlines in one place. It does not compute tax for you.