TDS limit for dividend income hiked from current Rs 5000 in Budget 2025: small shareholders to benefit
Budget 2025 proposes to increase the Tax Deducted at Source (TDS) threshold for dividend income from Rs 5000 to Rs 10,000 in a particular financial year. This amendment will take effect from April 1, 2025.
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The Finance Minister said, “It is proposed to provide that no tax is required to be deducted when the amount or aggregate of amounts of such dividend, distributed or paid or likely to be distributed or paid, to the shareholder, being an individual, does not exceed Rs 10,000.”
Section 194 of the Act requires that the principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment by any mode in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of all sub-clauses of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rate of 10%.
The first proviso to this section states that no tax is required to be deducted when the amount or aggregate of amounts of such dividend, distributed or paid or likely to be distributed or paid, during the financial year by the company to the shareholder, being an individual, does not exceed Rs.5,000/-. 3. It is proposed to provide that no tax is required to be deducted when the amount or aggregate of amounts of such dividend, distributed or paid or likely to be distributed or paid, to the shareholder, being an individual, does not exceed Rs. 10,000.
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How individual shareholders are paying double tax on dividends
Chartered Accountant Suresh Surana says, "The Dividend Distribution Tax (DDT) was first introduced in the Budget 1997 as a means to simplify the taxation of dividends. Over time, it underwent several modifications before being abolished in 2020, transferring the tax burden directly to shareholders in a bid to improve transparency and align with international practices.After the abolition of the Dividend Distribution Tax (DDT) w.e.f. FY 2020-21, now dividends are taxed in the hands of resident individual shareholders as per the income tax slabs applicable to them. For these taxpayers whose net taxable income exceeds Rs 10 lakhs in the old tax regime or Rs 15 lakhs in the new tax regime, the effective marginal tax rate is 31.2%, which progressively increases to 35.88% where taxable income exceeds Rs. 1 crore (irrespective of the tax regime). This coupled with the corporate tax rate of 25.17%, results in an effective cumulative tax of 48.51%.
This happens because firstly, the company pays tax on the profit earned at 25.17% (22% plus 10% surcharge plus cess 4%). Thereafter, the dividends are declared from the profit amount left after tax. On the dividend amount received by the individual shareholders, tax is again levied at the income tax slab rates applicable to them, say at 31.2% (30% plus cess at 4%)."
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This story originally appeared on: India Times - Author:Faqs of Insurances
