In a move to tax wealthy individuals, with the increase in surcharge to 15%, Budget also proposed to tax the dividend received by individuals. The government has proposed to impose 10 per cent tax on dividend exceeding Rs 10 lakh on individuals and firms. Budget to tax the exempt dividend.

Now, the wealthy individuals, HUF and promoters of companies will have to pay tax on dividend received exceeding Rs. 10 lakh per annum. Under the existing provisions of the Income-Tax Act, 1961, dividends are taxed at the rate of 15 per cent at the time of distribution in the hands of the company and are exempt in the hands of the shareholder.

 

This means that at an assumed dividend of 10%, an investor will need to have a portfolio ofRs.1 crore, to begin paying this tax. This is in addition to the 28.84% that the company already pays on this income.

 

Post this announcement; more than a dozen companies have announced dividends and many more are likely to follow. This could lead to a rise in dividend distribution in the next one month. This could generate short-term buying interest as yields have become attractive with falling stock prices. 

 

The rationale behind the move is that those who have high dividend income are subjected to tax only at the rate of 15 per cent (DDT paid by companies), whereas such income in their hands would have been chargeable to tax at the rate of 30 per cent.

 

The new tax proposal will be applicable from April 1. Any dividend declared before March 31, 2016 will not be taxable at the hand of the recipient.

 

However, once the move comes into effect from April 1, 2016, companies may avoid declaring high dividends and may opt for the more tax-effective buy-back option. The tax may even accelerate the exit of investors from the equity market prior to declaration of dividends and book closure dates, besides creating a disparity between resident and non-resident investors, as the latter are outside the purview of the tax.

Normally it will take 7-10 days for companies to declare dividend by calling the board meetings, so timeline is not an issues. Therefore, it is possible for listed companies to declare and pay interim dividends before 31st March itself.

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