Less Taxing, More Rewarding

It is raining dividends before the new tax rules kick in

- NITI KIRAN

Do you get more when you give more? Yes, India Inc. believes so. The country’s 500 most valuable companies were generous with dividends. It's hardly surprising then that promoters, the largest shareholders in companies, turned out to be the biggest beneficiaries. Equity dividends paid by these companies touched ₹2.27 lakh crore in FY20, which was a high of at least five years. They grew 14.7 per cent compared to 2.8 per cent increase in FY19 and average growth of 9.2 per cent in previous three years. This was despite a 26.6 per cent fall in their combined net profit as against a rise of 20.2 per cent in FY19. Revenue growth of the sample was anaemic too.

A Paradigm Shift

So, what made these companies distribute as much as 66 per cent of their earnings as dividends, when the average figure for previous five years was only 43 per cent? “Change in dividend taxation rules with effect from April 1, 2020, enticed a lot of promoters to give higher dividends. The total tax burden was lower before April 1, 2020,” says Deepak Jasani, Head of Retail Research, HDFC Securities.

The Budget 2020 had scrapped dividend distribution tax (DDT) on companies and shifted the tax burden to shareholders at applicable rates. Till FY20, companies were required to pay 15 per cent DDT on dividend, plus surcharge and cess, in addition to tax on profits. However, from FY21, India adopted the classical system of dividend taxation under which dividends shall be taxed in hands of recipients at applicable tax rates. This means a promoter or shareholder with income in excess of ₹5 crore will end up paying up to 43 per cent tax (his/her tax slab) on dividend income. The effective tax rate for dividend paying companies was 20.56 per cent (including cess and surcharge) in the older regime.