Finance Minister Nirmala Sitharaman announced the decision to abolish the dividend distribution tax (DDT) levied on dividends issued by companies. In her Union Budget 2020 speech, Finance Minister said that the decision would encourage low-income earners to invest in the capital market and provide relief to a large class of investors. According to the decision, the taxes on income received from dividends will now have to be paid by the shareholders depending on their income tax slab rates.

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Presently, companies distributing dividends need to pay DDT at 15%, which after including surcharge and cess comes at an effective rate of 20.35% directly to the government. Hence, out of every ₹100 paid in dividend by a company, ₹20.35 is required to be paid as tax, giving ₹79.65 to shareholders. Additionally, for investors, up to the maximum limit of ₹10 lakh the dividend received is tax-free, after which a tax rate of 10% of the dividend received in a fiscal is applicable.

With the new proposal, all investors are required to treat their divided receipts as income and pay taxes at their applicable tax rates. The government said in a statement that the new system would encourage investment in the debt mutual fund market as most individuals would be liable to pay tax at a lower rate on income received from a debt fund. They further added that the single rate of taxation was only favorable for taxpayers in higher tax slab and worked against those who were in lower slabs.

The government said, "Low-income earners would be encouraged to invest in the capital market as the person with a gross income of up to ₹5 lakh will not have to pay tax on dividend income as against the previous 20.56% paid by them indirectly."

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The dividends declared between 1st April 2003 and 31st March 2020 will be subject to DDT under the old regime, whereas those declared after 1st April 2020 will be excluded. After the abolition of DDT, the dividend received by a taxpayer will form the part of the total taxable income under the head "income from other sources".

Moreover, income distributed after April 1, 2020, by a mutual fund registered with SEBI or a specified company will be taxable in the hands of the taxpayers. An Indian company distributing dividends covered under Section 2 of the Income Tax Act, 1961, must deduct income tax (TDS) at the rate of 10% if the amount distributed is above ₹5,000.

According to experts, the removal of DDT will especially benefit low-income taxpayers as their net receipts after taxes will increase. The taxpayers in 20% tax bracket may not notice any changes, while taxpayers in the 30% tax slab will have to pay more tax.

(By- Kapil Rana, Chairman and Founder, HostBooks Limited)

(Disclaimer : The views expressed in this article are of the author)