Budget 2019 expectation - Dividend taxation easing needed; you pay this much on income from equities

Every income that arises, but not from your salary, is classified as ‘Income from other sources’ as per Income-Tax department. One such source is the market. In fact, it is a vast investment pool with a host of ways to earn money. One of the benefits of investing in stocks is that you don’t just receive money when you sell the shares you hold that are soaring high, you also get paid in terms of dividends that a company announces. Now that, the Union Budget 2019 announcement is just a few days away,  experts believe the easing of taxation under dividend income is needed. Reason behind relief is because corporate taxes are at the highest level, and sadly dividend taxation just makes it even more difficult for investors and shareholders to reap maximum benefit from stock dividend. 

What is dividend income? 

A company which is listed on Dalal Street, distributes dividends to their shareholders and investors. This dividend is a portion from a company’s earnings, and are decided and managed by that company’s board of directors. There many ways to issue dividends such as cash payments, as shares of stock, or other property. However, cash dividend are most common and followed by majority companies. 

Apart from companies even many mutual funds and exchange traded funds (ETF) pay dividend to their investors. 

Hence, dividend is a reward or token to investors and shareholders for their investment in a company’s equity, and is derived from the net profit. 

Taxation on dividend company! 

The dividend you receive from an Indian company, is generally exempt from taxes, as per Income Tax department guidelines. This usually happens because a company has already deducted dividend distribution tax (DDT) before making dividend payments. However, just like everything has a limit and boundary even dividend income and its taxation has one. 

As per the Finance Act 2019, dividend income exceeded Rs 10 lakh to resident individual/Hindu Undivided Family (HUF)/ firm, then the receiver will be liable to pay tax rate of 10% on the exceeding amount under section 115BBDA. This means that dividend income upto Rs 10 lakh given by a domestic company is exempt from any form of taxes, however, above that limit they do fall under income tax bracket.

For example - Mr XYZ received dividend income of Rs 16 lakh from a certain company during a fiscal year. As dividend upto Rs 10 lakh is exempted from taxes, that means 10% tax rate will be levied on extra Rs 6 lakh. Hence, here the investor or shareholder will have to Rs 60,000 tax (10% of Rs 6 lakh) to the IT-department. 

Also, considering dividend is an income which is from other sources, a taxpayer will have to file an Income Tax Return (ITR) for the same every year. 

If dividend is received from any foreign company, then every amount is taxable. This sort of dividend income is included in the total income of a taxpayer and tax rate is levied accordingly. For example, if a taxpayer falls under 30% tax slab rate, then such dividend from a foreign company will also be taxable at 30% rate along with other cess. 

Coming back to budget, there is a need for relaxation in dividend income in order to encourage more investment in equities. 

Archit Gupta, Founder & CEO ClearTax said, “The  government should also have a relook at the policy for dividend taxation in the hands of an investor/shareholder.”

“Dividends are rewards to shareholders out of the taxable profits of a company. Taxpayers must be encouraged to make equity investments and participate in the capital formation of a company,” said Gupta. 

Hence, a relief in dividend can definitely turn many favors for equity market.