Budget 2016: Widening of the DDT net to Individuals/ HUF/ Resident in India

1922

Prior to today’s session of Budget 2016, dividends received from listed companies was not taxed in the hands of the shareholders (Individuals/ HUF/ Resident of India). The company paid taxes (more than 28% effectively) on that money before it was paid out. 

 Effective 1 April, 2016 any dividend income from a company received by an individual or a HUF in excess of Rs. 10 lakhs in a year, shall be taxed at a rate of 10%. This is only limited if the dividend income is greater than 10 lakhs in a year. The first 10 lakh of dividend is tax free.

It also applies to mutual fund dividend payouts and private company dividends. 

Update: Alert reader Prajesh points out that this doesn’t apply to mutual fund units yet (since the section change applies to 115-0, which is dividend from stocks, while dividend from mutual funds is in 115-R). We stand corrected.

The rule does not cover or talk about non-individual investors which implies that Trusts, Companies (Parent companies that receive dividend income from their subsidiaries) will not have to pay the 10% tax. The parties that are affected are individuals/HUFs and firms.

This shall be applicable from the 1 April, 2016 which means that the dividends declared before 31 March, 2016 would not be taxable.

However, dividends taxed would mean effectively a lower recognized return on dividends received from equities.

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Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion. 

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13 COMMENTS

  1. What about Dividends received via Equity Mutual Fund?. Nothing explicitly mentioned about the same since we are not holding any equity directly nor are the dividends we receive as MF Holders solely out of Dividends received by AMC from the equity they hold but may also include Capital Gains by selling stocks the MF AMC holds. What would be the effect then?

    BTW, your first paragraph in the article is confusing “Prior to today’s session of Budget 2016, dividends received from the companies listed on the stock exchange was not taxed in the hands of the **shareholders** (Individuals/ HUF/ Resident of India). The taxation was only levied on the dividend paid to a company’s **investors**.”
    So as per you, Shareholders are not Investors? Not even if they hold onto the stocks for years or decades?

  2. “Dividends of MFs also get taxed this way!” – can you provide any reference from the budget document which says so?

  3. Deepak,

    As per the Memorandum of Finance Bill 2016, Page 4; the 10% tax on Dividend above 10L is for the dividends u/s 115-O and not u/s 115-R(div from MFs)

    Please correct me if I am wrong.

    _____________________________________________________________________________________________________________________________

    B. Additional Resource Mobilisation
    Rationalization of taxation of income by way of dividend Under the existing provisions of clause (34) of section 10 of the Act, dividend which suffer dividend distribution tax (DDT) under section 115-O is exempt in the hands of the shareholder. Under section 115-O dividends are taxed only at the rate of fifteen percent at the time of distribution in the hands of company declaring dividends. This creates vertical inequity amongst the tax payers as those who have high dividend income are subjected to tax only at the rate of 15% whereas such income in their hands would have been chargeable to tax at the rate of 30%.
    5
    With a view to rationalise the tax treatment provided to income by way of dividend, it is proposed to amend the Income-tax Act so as to provide that any income by way of dividend in excess of Rs. 10 lakh shall be chargeable to tax in the case of an individual, Hindu undivided family (HUF) or a firm who is resident in India, at the rate of ten percent. The taxation of dividend income in excess of ten lakh rupees shall be on gross basis. These amendments are proposed to be made effective from the 1stday of April, 2017 and shall accordingly apply in relation to assessment year 2017-18 and subsequent years. [Clause 7 & 50]

  4. Hi,
    Just to add DDT on dividend declared by Companies is 15% based on gross-up method. If the net dividend is Rs. 100 then Gross would be 100/0.85 = Rs. 117.65. Therefore DDT is Rs. 17.65.

    Regards

    Hiren Dharamshi

  5. The article states that “The first Rs10 lakh of dividends is tax free”.this is wrong since the budget proposes a 10% tax on gross amount of dividend if the Dividend received is greater than Rs 10 lakhs. This means that the entire dividend would be taxed.
    Also, is it very clear and certain that dividends from Mutual Funds will not be taxed? Is there any clarification from the Finance Ministry ?

    • The actual bill contains the text that upto 10L is tax free (“tax applies on amount received beyond the limit of 10L”)

      Div from MF will not be taxed as they come under 115-R. The bill states only 115-O which is for div from companies.

      • Yes. However it is reported that the bill also states that if dividend received is greater than Rs10 lakhs then the tax will be on the gross amount. Hence this implies even the first Rs10 lakhs will be taxed….Correct me if I am wrong.

        • Good point: “With a view to rationalise the tax treatment provided to income by way of dividend, it is proposed to amend the Income-tax
          Act so as to provide that any income by way of dividend in excess of Rs. 10 lakh shall be chargeable to tax in the case of an individual,
          Hindu undivided family (HUF) or a firm who is resident in India, at the rate of ten percent. The taxation of dividend income in excess
          of ten lakh rupees shall be on gross basis.”

          The “gross” basis I thought referred to the fact that you cant offset any losses. But you may be right here in that they don’t even get the first 10 lakh free! The bill says :
          115BBDA. (1) Notwithstanding anything contained in this Act, where the total income of an
          assessee, being an individual, Hindu undivided family or a firm, resident in India, includes any
          income exceeding ten lakh rupees, by way of dividends declared, distributed or paid by a domestic
          company, the income-tax payable shall be the aggregate of—
          (a) the amount of income-tax calculated on the income by way of such dividends, at the rate of
          ten per cent.; and
          (b) the amount of income-tax with which the assessee would have been chargeable had the
          total income of the assessee been reduced by the amount of income by way of dividends.
          (2) No deduction in respect of any expenditure or allowance or set off of loss shall be allowed to
          the assessee under any provision of this Act in computing the income by way of dividends referred
          to in clause (a) of sub-section (1).

          Again, this is confusing = “such” dividends means dividends > 10L or just total dividends? I hope we get a clarification.

  6. Any one else surprised by the lack of protest against this? It effectively triple taxation of the same income.

  7. I wonder how people tolerate this. The profit from which the dividend will be paid out is itself only left after the tax has been paid (approx 30%).This is then double taxed @15% (Dividend Distribution Tax). Then this small sum remaining is also taxed at 10%!!!
    Why no outcry from anybody??

Comments are closed.