The dividends obtained from any Indian Firm upto Rs. 10 Lakhs are tax free within the fingers of the traders below Part 10(34). Nevertheless, the dividends obtained from any Mutual Fund Firm are totally exempt with none most restrict below Part 10(35).
Earlier dividends from each Indian Firms in addition to Mutual Funds have been totally tax exempted however with impact from Monetary 12 months 2016-17 – a most cap has been levied on dividends obtained from Indian Firms. With this modification, the dividends obtained from Indian Firms are tax exempted upto Rs. 10 Lakhs whereas the dividends obtained from Mutual Funds proceed to be tax free with none max restrict.
Cause for 0% Tax on Dividends
Earlier, tax on dividends was liable to be paid as per the Revenue Tax Slab Charges. Nevertheless, there have been only a few taxpayers who used to genuinely disclose the dividends obtained and pay taxes thereon.
Subsequently in order to make sure correct assortment of taxes on dividends, the govt. has modified the way of charging tax on dividends. They’ve now made dividends obtained from any home firm as tax free within the fingers of the traders.
Nevertheless to compensate the loss that might be arising from making such dividends as tax free, they’ve enforced an additional tax on the businesses on the time of asserting dividends. As per Part 115-O, on the time of cost of dividend, they must pay a dividend distribution tax from the income of the corporate.
Though the Indian Govt has exempted the dividends from the levy of tax within the fingers of the taxpayers, they’ve not directly collected the tax on dividends from the businesses by implementing Dividend Distribution Tax. This may be defined with the assistance of an instance:-
For instance, an organization intends to declare a dividend of Rs. 100 to its shareholders and the speed of Dividend Distribution Tax is 15%. Now, the corporate will first must pay 15% of Rs. 100 i.e. Rs. 10 as Dividend Distribution Tax to the Govt. As the corporate has been made to pay Rs. 15 to the govt. for declaring the dividend, successfully it’s left with solely Rs. 85 to pay as dividends to the shareholders.
Thus, with the introduction of the dividend distribution tax, the govt. has not directly collected the tax on dividends immediately from the corporate on the time of declaration of dividends and the traders have been paid dividend from the stability quantity after cost of dividend distribution tax.
Dividend Distribution Tax Charges
The Dividend Distribution Tax Charges are as follows
| Particulars | Charge of Tax |
| Home Firms | 15% + 10% Surcharge + 3% Cess = 16.995% |
| Fairness Mutual Funds | NIL |
| Different Mutual Funds | 25% + 10% Surcharge + 3% Cess = 28.325% |
This Dividend Distribution Tax is just required to be paid by Indian Firms. In case of any international firm, dividend distribution tax gained’t be payable and tax on dividends obtained can be payable as per the traditional Revenue Tax Slabs.
Dividend Stripping
At any time when the dividend is distributed, the market worth of the share reduces by an equal quantity.
Some individuals tried to purchase a share earlier than dividend, obtain the tax free dividend after which promote the share. Because the market worth of the share would have fallen, they have been capable of e book a capital loss. There was no loss in precise as that they had already obtained this quantity as dividend however on paper – there was a capital loss.
This follow of producing a loss on paper is named Dividend Stripping.
To make sure that individuals don’t take good thing about Dividend Stripping, the legislation was amended and now any Capital Loss is not allowed to be claimed to the extent of Dividend obtained. The identical has been defined with examples on this article – Tax Implications of Dividend Stripping.