INTRODUCTION:
Earlier
Dividend
distribution tax (DDT) was charged to the companies after the deduction of
corporate tax and before the distribution of dividends. DDT was very debatable
as it led to double taxation. After the deduction of DDT, the dividend received
by the investors was not taxable. It was a tax-free income for all the
investors. It led to inequality of taxability on account of those who are
liable to pay less tax.
Now
In the Budget
of 2020, our Finance Minister announced the abolishment of DDT and made
dividend taxable in the hands of investors. After the abolition of DDT the
dividend income will be taxed on the hands of the investors. In simple words
before the abolition of DDT, the companies first pay corporate tax, after the
payment of tax the company pays DDT on the profit that remains but now after
the payment of corporate tax the dividend will be distributed and the dividend
income will be taxable directly to the investors.
RESULT OF
ABOLITION:
After the
abolition of the DDT the Dividend income will be taxed according to the tax slabs
of the investors. The tax on dividend income will not remain the same as
earlier which was 20.56%, it will now be taxed according to the income slabs the
investor falls in.
This move
will be profitable for the retail investor with tax slabs less than 20% as now
they will have to pay less amount for the tax against the dividend they will
receive. This will boost the investment in the economy from the retail
investors. On the other hand, this move will cut down on the earning of HNIs as
their tax slabs will be higher than that of earlier DDT. HNIs will have to pay
more tax on account of the dividend income they will receive.
Some foreign investors could not claim a credit against DDT. After the abolition, India will become an attractive destination for investment.
SHOULD
INVESTORS OPT FOR DIVIDEND PLAN:
Usually,
investors who want to have regular income opt for dividend option. After the
abolition, the tax burden on those who are liable to pay less tax will be
removed. This will benefit the investors belonging to lower tax rate slabs.
However, investors with a higher income bracket will have to suffer.
In this case
to have a regular income, investors should choose for growth plans as the tax
rate will be higher for the dividend option. If the investor with a higher income
bracket continues to go for a dividend plan then they will have to bear the loss on
account of the increased tax rate. If we invest in debt funds for the long term (more
than 3 years), then the growth plan works out better for those in 20.8 percent tax
brackets and above. This will not be a profitable option for them so they
should look for other options such as growth funds. Investors with lower income
brackets can continue to stick with dividend plans as they will get the
advantage of a lower tax rate.
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