Dividend Distribution Tax: Will abolished DDT benefit you if your income is high?
The FM in her budget speech proposed to remove DDT and adopt the classical system wherein the dividend shall be taxed in the hands of the recipients at their applicable slab rates and companies will no longer be required to pay DDT.
The Union Budget 2020-21, presented by Finance Minister Nirmala Sitharaman, has brought in some major changes for investors, including the treatment of Dividend Distribution Tax (DDT). The FM in her budget speech proposed to remove DDT and adopt the classical system wherein the dividend shall be taxed in the hands of the recipients at their applicable slab rates and companies will no longer be required to pay DDT. The dividend distribution tax (DDT) has been abolished at both the company and mutual fund levels. However, tax will be deducted at source (TDS) on such dividend incomes in excess of Rs 5,000 per annum at the rate of 10%.
Under the current tax regime (until March 31, 2020), Indian corporates have to pay tax at an effective rate of 20.56 per cent on their distributable profits directly to the government. Effectively, out of every 100 rupees in distributable profits, companies had to pay Rs 20.56 as tax, with only Rs 79.44 left for distribution to shareholders. On the individual front, earlier a taxpayer had to pay tax on dividend at 10% only in cases where dividend received from Indian companies was more than Rs 10 lakh and no tax was payable in case of dividends received from mutual funds.
Impact on resident dividend recipients:
The benefit of abolished DDT will depend on the tax-bracket that the individual investors fall into. For those who are currently under the 20 per cent tax-slab, the abolition of DDT will benefit them, since the effective DDT would’ve been higher and therefore they will pay a less taxes on dividend income.
Those residential individuals and trusts who fall under the highest slab of 30% with income more than Rs 5 crore have an effective tax rate of 42.7% (including surcharge and cess) would be the biggest losers in the proposed DDT regime. Earlier, the effective tax rate on their dividend income was 34.8% i.e. DDT at 20.6% plus income tax at 14.2% (tax at 10% plus surcharge and education cess).