Impact of Budget 2020 on Dividend Distribution Tax

The annual union budget is the one thing that every Indian business owner and investor looks forward to at the start of every New Year. Also referred to as the Annual Financial Statement, Union Budget is more like a statement of the government’s estimated expenditure for a particular financial year. The much-awaited Budget 2020 came with its fair share of surprises for Indian citizens, one of which was the abolition of the Dividend Distribution Tax (DDT). In simple words, the dividend income from shares and mutual fund investments will now be taxed at the investors’ end at applicable income tax rates.

Let’s dig deeper to know more about DDT before talking about its new implications.

What is a Dividend Distribution Tax?

The shareholders of an Indian company receive a certain return out of its profits every year. This return is known as a dividend. In an ideal case, the dividend must be subjected to income tax as per the related laws. However, things turn out the opposite way in this aspect of capital investment. Income tax laws gave an exemption of the dividend income to the shareholders but levied a tax on the company paying the dividend, known as DDT. Section 115O of the Income Tax Act governs the provisions related to this tax. It was first introduced in 1997 at a flat rate of 7.5%.

At What Rate Does an Indian Company Need to Pay DDT?

Indian companies that declare or distribute a dividend to its shareholders were required to pay DDT at the rate of 15% of the gross dividend amount. It also attracted an additional surcharge and cess, which made the effective rate of DDT to be 20.56%.

On a grossed-up dividend of Rs. 2,00,000, DDT charged at the rate of 15% would be Rs. 30,000, excluding surcharge and cess.

DDT on Mutual Fund Investment

Furthermore, DDT was also applicable to mutual fund investments at different rates, depending on the type of funds.

  • The effective DDT rate on debt-oriented funds, including surcharge and cess is 29.12%.
  • Similarly, the effective DDT rate on equity-oriented funds is 11.65%, as introduced in Budget 2018. Previously, these funds were exempt from DDT.

Possible Effect of Abolition of DDT

Since its inception, the DDT rate has considerably increased in the last two decades. Not just that, many domestic companies criticized this tax as they need to adjust their tax payouts. On the other hand, investors or shareholders argue about it in terms of double taxation.

The elimination of DDT as per Budget 2020 acts as a relieving move directed towards Indian companies. The dividend income will now be taxed at the investors’ end as per their income tax liability. The new provisions will be put into effect from April 1, 202o, and comes with the following probable impact:

  • Financial analysts believe that the removal of DDT will ultimately increase the quantum of profits distributed amongst the shareholders.
  • Foreign investors will get the benefit of dividend tax paid at the time of filing return in their native countries.
  • It will also benefit the taxpayers as they receive a larger amount in their hands after tax deductions.
  • Income from mutual fund investment in the funds registered with SEBI or a specific company after April 1, 2020, will be taxable at the investor’s end. It will come under the ‘income from other sources’ head of the taxable income.

What’s in it For Mutual Fund Investors?

If you are an avid investor in mutual funds, your income from the mutual fund investment was exempted from paying the tax. However, as per Budget 2020, the tax liability will now fall on you. There is nothing to worry about because the dividend is likely to increase. If you feel you need to revise the mutual fund investment strategy, seek help from leading financial advisors, such as FinEdge. Also, make sure you read and understand the impact of the new budget on your investment profile.

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