In her last Budget, Finance Minister Nirmala Sitharaman had removed the Dividend Distribution Tax (DDT) and made the dividend income taxable in the hands of investors. As a result, no DDT was levied, but from April 2020, investors started receiving dividend after tax deducted at source (TDS) at a rate of 10 per cent by the organisations distributing dividend irrespective of the tax slab in which investors fall.
However, to stimulate the economy – struggling after the imposition of nationwide lockdown to contain the spread of highly contagious Novel Coronavirus COVID-19 – the Finance Minister has announced several measures as part of the Rs 20-lakh crore stimulus package of the government.
One of the measures was a 25 per cent reduction in Tax Deduction at Source (TDS) and Tax Collection at Source (TCS), which will be applicable for all types of non-salaried transactions, including payment of dividend from May 14, 2020 to March 31, 2021.
So, the TDS on dividend distribution will be reduced from 10 per cent to 7.5 per cent, resulting in a 2.5 per cent increase in dividend payouts.
This will infuse more liquidity in the hands of investors, which would enhance the demand of goods and services, paving the path of economic recovery.
“The reduction in TDS/TCS rates for all non-salaried payments to residents by 25 per cent is useful as it would put that much more cash in the hands of the recipients of those payments and that is the whole purpose of this package,” said Daksha Baxi, Head-International Taxation, Cyril Amarchand Mangaldas.
While the TDS rate cut would be a net gain for investors having gross total income of Rs 5 lakh in the financial year 2020-21, investors in higher tax brackets have to be careful about paying the additional advance/self assessment tax to compensate the lower tax cut than their actual tax brackets.