Ordinary vs. Qualified Dividends: What’s the Difference

Dividends can be taxed in different ways depending on their classification. The two most common types are ordinary dividends and qualified dividends, and each has distinct tax implications. Understanding these can help investors optimise returns and avoid tax surprises.

An ordinary dividend is the most common type of dividend paid by corporations to shareholders from their earnings and profits. These dividends are typically distributed in cash and reflect a share of the company's income. However, for tax purposes, they are treated as ordinary income rather than capital gains.

Ordinary dividends are taxed at the investor’s applicable income tax rate, which varies based on the total taxable income and tax bracket. They are reported on IRS Form 1099-DIV, Box 1a in the United States.

Examples of ordinary dividends include payments from Real Estate Investment Trusts (REITs), Master Limited Partnerships (MLPs), and money market mutual funds. These types of dividends do not meet the requirements for lower tax rates and should be factored into tax planning accordingly.

A qualified dividend is a type of dividend that meets specific criteria set by the IRS to receive favorable tax treatment. Unlike ordinary dividends, qualified dividends are taxed at the lower long-term capital gains tax rates—typically 0%, 15%, or 20%—depending on the investor's income level.

To be considered qualified, the dividend must be paid by a U.S. corporation or an eligible foreign entity, and the investor must meet a holding period requirement. This generally means holding the stock for more than 60 days within the 121-day period surrounding the ex-dividend date.

Qualified dividends are reported on Form 1099-DIV, Box 1b. They are often paid by blue-chip U.S. companies and provide tax-efficient income for long-term investors.

Understanding how dividend classification impacts your tax bill is key. Here are two simplified examples:

Example 1: Ordinary Dividend

You receive ₹10,000 in dividends from a REIT (Real Estate Investment Trust).

• This is classified as an ordinary dividend.
  

• You are in the 30% income tax bracket.
  

• Tax payable = ₹3,000 (30% of ₹10,000)

Example 2: Qualified Dividend

You receive ₹10,000 in dividends from a listed U.S. company, and you meet the holding period requirement.

• This is a qualified dividend.
  

• You fall into the 15% long-term capital gains bracket.
  

• Tax payable = ₹1,500 (15% of ₹10,000)

Net Savings: ₹1,500 difference in tax liability, just by dividend classification.

• Not all dividends from stocks are “qualified”—even if paid by a listed company.
  

• Dividends from REITs, MLPs, and money market funds are generally ordinary, not qualified.
  

• Receiving a Form 1099-DIV doesn’t mean all dividends are taxed at lower rates—check Box 1a (ordinary) vs. Box 1b (qualified).
  

• Licensing or broker errors can lead to misclassification—always review your year-end tax documents carefully before filing.

• Ordinary dividends are taxed at regular income tax rates and reported in Box 1a of Form 1099-DIV.
  

• Qualified dividends benefit from lower long-term capital gains tax rates and appear in Box 1b.
  

• To qualify, investors must meet holding period and issuer eligibility criteria.
  

• Knowing the difference helps in effective tax planning and maximising after-tax returns.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.