Dividend Tax Liability May Be Shifted From Companies to Investors, Here’s Why
Nov 15, 2019

Author: Divya Grover

Dividend Tax Liability May Be Shifted From Companies to Investors, Here’s Why
(Image Source: photo created by katemangostar - www.freepik.com)

After the corporate tax rate cut bonanza, the government may provide yet another incentive for India Inc. to boost their earnings. As per media reports, the budget to be announced in February 2020 may include a proposal to shift tax incidence on dividend from the companies to investors.

At present, a company that declares/distributes dividend is required to pay dividend distribution tax (DDT) at the rate of 15% of the gross dividend amount (excluding surcharge and cess). DDT is also applicable on dividend declared by mutual fund schemes. It is levied at the rate of 25% and 10% (excluding surcharge and cess), respectively, for debt and equity oriented mutual funds.

The shift in tax to investors will lead to reduced tax liability for companies. Lower tax incidence for companies can encourage them to enhance their spending towards capital formation or pass on the benefits to the consumer that can address the economic slowdown to some extent.

It is expected that the shift will not impact the collections from DDT to the exchequer because the dividends are currently tax free in the hands of the investors; the dividend amount distributed to them is after deducting DDT.

Earlier DDT was applicable only on debt mutual funds, but in the 2018 budget, the government introduced DDT on equity funds as well. It has been a long-standing demand of investors and companies that the dividend distribution tax be scrapped.

[Read: Should You Opt For Dividend Option Offered By Equity Funds Now]

Generally, investors looking for regular income opt for dividend option of mutual funds as bank deposits have become less attractive due to the falling interest rates. But earnings of mutual fund investors take a knock because of the high DDT since the net amount they receive is after deduction of tax.

Besides, investors also expect long term capital gain (LTCG) tax and securities transaction tax (STT) applicable on the transaction of securities to be tweaked. LTCG tax is levied on equity investments sold after one year. It is applicable for gains in excess of Rs 1 lakh and is taxed at the rate of 10%.

STT is levied on purchase and sale of securities such as equities, mutual funds, derivatives, etc. on stock exchanges. The rate of STT depends on the type of security being traded as well as the type of transaction.

These multiple levies make investment in securities less attractive and also hamper the inflows from foreign investors. The government may consider making changes in these taxes to enhance investors' sentiment. More money in the hands of investors as a result of lower tax can attract new investments.

Worried about the impact of taxes on your investment? Here is what you can do:

If you wish to grow your wealth, instead of choosing the dividend option opt for the growth option of mutual funds. When you opt for the growth option, the profits earned are reinvested and appreciates wealth through the power of compounding.

To generate regular income, instead of going for dividend option in debt fund where the DDT is 25%, you would be better off if you opt for systematic withdrawal plan (SWP). Through a SWP, you can withdraw a fixed sum of money from a mutual fund scheme regularly (monthly, quarterly, half-yearly or annually) and hold the potential to clock returns on the remaining investments over a period of time. It not only provides you with a fixed source of income, it inculcates a disciplined approach to spending too.

[Read: Can You Earn A Regular Income By Investing In Mutual Funds?]

Before if you invest in dividend option remember that ...

  • Dividend from mutual fund schemes is not guaranteed. It is only declared when the scheme makes profit and at the discretion of the fund house

  • Frequent dividend declaration by a mutual fund scheme is in no way an indicator of the scheme's performance

  • The dividend-adjusted return is nowhere close to the returns clocked under the Growth Option

Despite the applicable taxes on mutual funds, over the long-term, equity as an asset class still remains attractive to counter inflation and accumulate wealth. Loads and taxes may be applicable when you buy or sell mutual funds. To prevent unnecessary transaction, carefully select worthy mutual funds based on your financial objectives, risk profile, and investment horizon.

Editor's note: 

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Graph 3: Risk-return spectrum

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Add Comments

Nov 15, 2019

Surprised at the omissions in your article reflecting either lack of knowledge or carelessness putting you on par with other Organizations that are seen to mislead the public - are dividends from companies really tax free fully in the hands of investors??

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