Proposed changes in Dividend Taxability as per Union Budget 2016-17

Dividend:

Dividend is a sum of money paid regularly by a company to its shareholders out of its profits.  In commercial world it is  a share of the after-tax profit of a company, distributed to its shareholders according to the number and class of shares held by them.

Taxability of Dividend:

As per section 10(34) read with section 115 -O of the Income Tax Act, 1961, any income by way of dividend from Indian company is exempt from tax in the hands of shareholders  The Indian company is required to pay additional income tax on any amount declared, distributed or paid by way of dividend. The additional tax is referred as Dividend Distribution Tax (DDT).   DDT is required to be @ 15 % + surcharge @ 12 % and Education Cess and SHEC @ 3 % which comes to 17.30 %

Illustration:

Profit after Tax (Tax Rate: 34.61%)                                                   1000.00 

Dividend                                                                                               100.00

Tax on dividend (Tax Rate: 17.30%)                                                     17.30         

Amount distributed as dividend                                                             82.70

Proposed changes in Taxability as per Union Budget 2016-17

Section 10(34) is amended to provide that in case of Individuals, HUF and Firms, where dividend income exceeds Rs 10 Lakhs in any year, tax at the rate of 10% of gross amount of dividend in addition to applicable DDT will be levied .i.e, apart from Corporate Tax and DDT, further 10 % of tax on dividend will be charged. (i.e, 10 % tax + 15% surcharge + 3% Cess = 11.85% ).

The amendment proposed is effective form 1^st April, 2016.  Any dividend declared before 31^st March, 2016 will not be taxable at the hand of the recipient. If the Companies declare dividend after 31^st March, 2016, additional 10% tax will be charged in the hands of recipient if the dividend income exceeds 10 Lakhs.  

Further, this may also result in shareholding. And change in shareholding will attract the applicable provisions under various Act such FEMA, Takeover, Income Tax- Capital Gains, Inter – se transfers etc depending on the category of shareholder.