Dividend income will no more be tax free if DDT is abolished! Find out if you would gain or lose

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Updated: November 1, 2019 6:18:07 PM

There are media reports that the tax structure on equity is under review and to simplify the regime and make investments in Indian markets more attractive, the government may do away with multiple taxes.

income tax, dividend distribution tax, DDT, tax-free dividend income, high net worth individuals, HNI, tax liablility on dividend income, DDT on equity, DDT on equity mutual fund, MF, debt-oriented mutual fundOne of the attractions of investing in equities or in dividend payout option of equity mutual funds (MFs) were to earn tax-free dividend income up to Rs 10 lakh in a financial year.

Saving on tax is one of major decision making parameters of choosing an investment option. Apart from businessmen and seasoned investors, most people in India predominantly invest to save tax u/s 80C of the Income Tax Act or look for investments having tax-free return even if the return on investment is very low even if they are in lower tax brackets.

So, one of the attractions of investing in equities or in dividend payout option of equity mutual funds (MFs) were to earn tax-free dividend income up to Rs 10 lakh in a financial year. Dividend received in excess of Rs 10 lakh in a financial year shall be chargeable to tax at the rate of 10 per cent in the case of a resident individual, HUFs and firms.

However, there are media reports that the tax structure on equity is under review and to simplify the regime and make investments in Indian markets more attractive, the government may do away with multiple taxes, including the dividend distribution tax (DDT).

“It is reported that the government is considering abolishing dividend distribution tax and replace it with tax on dividend directly in the hands of shareholders,” said Ashok Shah, Partner, NA Shah Associates.

Although, dividend income up to Rs 10 lakh is tax free in the hands of the investors, but Indian companies pay an effective dividend distribution tax (DDT) on dividends distributed by them to their shareholders at 15 per cent, which is grossed up to 17.65 per cent (excluding cess and surcharge).

So, if you are in less than 20 per cent tax bracket, it will be beneficial for you and there would be hardly any gain or loss if you are in 20 per cent tax bracket.

“Individuals earning less than Rs 5 lakh would benefit as their effective rate of Tax is only 5 per cent, but the individuals earning more than Rs 5 lakh fall in 20 per cent tax bracket and may not benefit because of this abolition,” said CA Karan Batra, Founder and CEO of CharteredClub.com.

However, if you are in 30 per cent tax bracket, you have to pay more tax after DDT is abolished, which would pinch the high net worth individuals (HNIs) more, who need to pay surcharge on tax.

“As per present individual tax rates, abolition of DDT would substantially increase the tax liability of promoters and High Net worth individual investors,” said Shah.

If DDT is abolished, equity mutual fund investors would suffer more as the DDT is only 10 per cent on dividend distributed to equity MF investors.

“Presently, equity oriented mutual funds pay 10 per cent as income distribution tax on income distributed to the unit holders. The income distributed to unit holders is exempt in the hands of unit holders. In case the DDT is abolished, government will also have to abolish income distribution tax and make income distributed by the equity-oriented mutual fund taxable in the hands of the unit holders. Such move will impact large number of HNI who are investing in stock market through mutual funds,” said Shah.

On debt-oriented MFs, however, the DDT is 25 per cent and after including surcharge and cess it adds up to 29.12 per cent. So, except HNIs, majority of debt fund investors would gain, if DDT on debt fund dividends is abolished too.

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