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Dividend Income Tax Rate Being Slashed?

The Government is looking to slash the Dividend Income-Tax Rates by half. It has been planning to make amends to reduce DDT or Dividend Distribution Tax. The government is considering bringing down the effective Dividend Tax Rate from 43% to 20%. This new rate will be applicable to the domestic individual investors (HNIs) and may benefit the individuals in the highest tax bracket.

Earlier, DDT was 20% taxable in the hands of the company, which made it a pure cost. In Budget 2020, FM Nirmala Sitharaman removed this 20% DDT on companies, making it taxable at the hands of the investors. Shareholders have to pay tax as per their respective tax slabs. And after including the surcharge and cess, the highest bracket results in a 43% tax outgo.

Currently, Foreign Companies (FIIs) have to pay anywhere between 5% to 15% tax on Dividend Income. This varies depending on the tax treaty that India has with a particular foreign country. In comparison to the Foreign Companies, the Local Investors (in the higher income bracket) pay a tax of 43%. Several associations and investors have voiced their opinions about this anomaly. Thereby, seeking regulation on Dividend Income-Tax Rates. The Government has been trying to take the opinions of Senior Revenue Officials, Prominent Mutual Funds, Tax Advisors and Lawyers.

As per treaties the tax rate would be 15% for Mauritius and Singapore, 25% for the US and Canada and 10% plus an additional 5% depending on parameters like Most Favored Nation (MFN) status, etc.

“There is a difference of 22% between tax on dividends paid by a foreign company and by an Indian promoter and this has led to a situation where domestic companies are rushing to pay dividends before April 2020. Bringing parity between tax on dividend paid by Indian companies and foreign companies is a good move and will bring in ease of doing business,” said Girish Vanvari, founder, tax advisory Transaction Square.

Even after the government removed DDT and made it more like TDS, several foreign companies that invest through other countries end up paying taxes as low as 5%. The tax rates continue to remain substantially high for individuals in India and FPIs registered as trusts. This is creating a lot of unease among the Local Investors.

Even as the bears hold global markets at present, there is some chance that this may provide some relief.

Thus, the government may offer the concession by offering a flat 20% tax on dividend income. Stay tuned for the updates….

Source – Economic Times.

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Got Questions? Ask Away!

  1. Hey @Rachit_Awasthi1,

    Under Budget 2020, the Finance Minister abolished Dividend Distribution Tax i.e. DDT. As a result, dividend became a taxable income. Since it was now taxable, TDS would be applicable on it. Thus, the Budget also introduced the provision to deduct TDS on the dividend.

    • Sec 194 - A Company should deduct TDS at 10% on dividend paid on equity shares if the dividend amount exceeds INR 5,000. For FY 2019-20, this rate is reduced to 7.5%
    • Sec 194K - An AMC should deduct TDS at 10% on dividend paid on equity mutual funds if the dividend amount exceeds INR 5,000. For FY 2019-20, this rate is reduced to 7.5%

    TDS (Tax Deducted at Source) is applicable to many taxable incomes such as salary, professional fees, interest, commission etc. Since dividend income is a taxable income, TDS is applicable to it.

    You can claim the credit of deducted TDS as taxes already paid when you file your Income Tax Return. If the tax liability is more than TDS credit, you need to pay only differential tax. If the tax liability is less than TDS credit, you can claim a refund of the excess amount.

    If you have received an email for dividend you can know more about TDS on dividend paid in FY 2020-21 in the article mentioned below.

  2. I am salaried person, gross income 10 lakh and comes in individual resident category. I invested in share market and also get dividend 8000. But i am confused that how much dividend amount is tax-free in below options:

    1. TDS will be deducted at 10% on dividends received above INR 5000.

    2. Tax of 10% on dividend income in excess of Rs. 10 lakh per year.

    so which option is correct for current FY and option 2 is applicable to whom ?

  3. Option 2 of 10 lakhs applicable to which category ?

  4. Hey @Kuldeep_Singh,

    From AY 2021-22 onwards, dividend received by shareholder will be taxed in the hands of shareholders and not on company. Dividend is not tax free income and hence if total dividend exceeding of Rs. 5000 is liable to deduct TDS u/s 194 at the rate of 10%.

    Prior to AY 2021-22, tax on dividend was applicable to shareholders only when total amount exceeds 10 lakhs but now there’s no relevance of sec.115BBDA.

    For more understanding, you can refer below article for taxation on dividend income:

    Hope, it helps!

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