[Budget 2020] DDT Abolished: Companies Yay, Investors Nay

Dividend Distribution Tax abolished for companies, but tax on dividend income shifted to investors

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In a relief to companies, budget 2020 on Saturday announced to remove the infamous Dividend Distribution Tax (DDT).

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A dividend is the amount that a company or a mutual fund (MF) house pays its investors from its profits, and DDT is levied on that dividend. Domestic companies have to pay 15 per cent DDT on the aggregate dividend declared or paid. Additionally, 12 per cent surcharge and 3 per cent education cess is also levied, amounting to effective DDT of 20.35 per cent.

Industry experts say that removing DDT will encourage more direct foreign investments. Finance Minister Sitharaman said during the budget that the government will suffer revenue loss of around INR 25,000 crore due to this step.

But at the same, the budget shifted the tax burden on dividends to retail investors.  Dividend income from shares and MFs will be chargeable in the hands of the recipient at applicable income tax slabs.

Currently, an investor has to pay 10 per cent tax on dividend income only when it exceeds INR 10 lakh in a year. This meant that small investors largely stayed out from the ambit of dividend tax.

Shalini Jain, Tax Partner, EY India says, "Budget 2020 has proposed to abolish DDT on dividends paid by the corporates and transfer the tax burden completely in the hands of the recipient. Earlier, an individual taxpayer was required to pay tax on dividend at 10% only in case dividend received from Indian companies was more than Rs 10 lakhs and no tax was payable in case of dividends received from mutual funds. As per the budget proposal, the recipient of dividend would be liable to pay income tax at applicable rates irrespective of the amount of dividend received. This certainly entails higher tax burden for small and medium scale investors who did not earn dividend income in excess of INR 10 lakh and for large scale investors who were paying tax on dividend income at 10%. However, the corporates may pay higher dividends on account of removal of DDT liability as they will have more surplus funds for disposal."