Dividends refer to profits realised by companies which it shares with its equity shareholders. With the announcement of Budget 2020, a major change has been done on the tax liability on dividend income of the investor. When any company/ mutual fund decides to distribute its profit to its shareholders, Dividend Distribution Tax is levied. Earlier, dividends were taxed at the source by the distributing company and the remaining amount was passed on to the investor.
As per the announcement, dividends would be taxed at the hands of the investor, as per the income tax slab of the investor. Dividend income would be included in the taxable income of the investor under the heading “income from other sources” and then taxed accordingly.
One of the key benefits of abolition of DDT at the companies’ end is that now the dividends rollout would be more as they would have extra money (which would have gone into paying tax) to distribute. However, this benefit is limited to companies and Asset Management Companies.
When looked at from the investor point of view, this regime offers fewer benefits. The change is welcomed by investors who fall within the low tax slab bracket. “Single rate of taxation is always iniquitous as it favours taxpayers who are in higher tax brackets and works against those who are in lower tax brackets,” says a statement from the Central Board of Direct Taxes. For taxpayers with 30% slab, the new law brings in more loss than gains.
Dividends from investment in Sovereign Wealth Funds have been completely exempted from taxation. In addition to dividends, interest and capital gains from these funds are also exempted from tax to give a boost to investment in the infrastructure sector.
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Calculation of Tax Liability on Dividend Income
Let’s understand the new tax regime with an example:
Suppose a company decides to pay ₹5,000 as dividend to an individual. As per the old law, the company was liable to deduct 15% of this amount. If we include surcharge and cess, this rate becomes 20.56%. Thus, an investor used to get ₹3,972 post indirect tax deduction. Under the new regime, an investor will get ₹5,000 in hand. That amount will be deducted as per the tax bracket of investor, if s/he has a total taxable income upto ₹5 lakh, there is no tax liability. However, if one falls in the tax bracket of 30%, s/he is liable to pay ₹1,500 as tax on the dividend received. This reduces the overall gains of the investor.
As we can see, abolition of DDT is beneficial for the AMCs, the firms distributing dividends, and the investors lying in the low income tax bracket. However, investors who fall in the 30% tax bracket can see a significant fall in their dividend gains post tax deduction.
FAQs on Dividend Distribution Tax
Q. Do Debt-oriented funds declare dividends?
How does abolition of DDT affect dividend plans of Mutual Funds?
Ans. The dividend plans of mutual funds made it mandatory for fund houses to declare dividends on the gains made by the schemes. This dividend was taxed at 11.64% for equity funds, and around 29% for debt funds. Now it will be taxed as per the tax bracket. If someone falls in the highest tax bracket, s/he needs to pay around 30% tax, plus surcharge and cess. This high tax rate will impede investors from opting for the dividend plan of mutual funds.
How much time does it take for an investor to receive dividends?
Ans. Investors are entitled to receive dividends within 30 days post declaration by the mutual fund.
Can I reinvest the dividend declared by mutual funds?
Ans. Yes. You can choose to reinvest the proceeds from dividends by opting for the growth plan of the mutual fund scheme. The plan ensures that the dividends declared are automatically reinvested in the scheme.
Who should opt for a Dividend Plan of Mutual Funds?
Ans. Investors who are looking for an extra regular income source can consider opting for a dividend plan, after taking into the tax liabilities on that dividend income. The compounding effect of mutual funds becomes redundant if one chooses to take out the accumulated profits time to time.