Dividend income tweak to help investors

A single amendment in tax laws can have multiple repercussions. That’s because taxmen stick to the wordings of the law even if they cause hardship to the taxpayer. This is what happened when the government decided to tax dividend income in the hands of the receiver in the earlier budget, which it has rationalized in the latest one.

An individual must pay advance tax on all income except those that are specifically excluded. Typically, income like capital gains is excluded from advance tax payments because it’s difficult for taxpayers to estimate how much income they would make in that year and then compute tax on it.

While the government decided to tax dividend income, it didn’t mention it in the list of excluded income. Due to this, investors who expected companies or mutual fund schemes to offer dividends had to estimate the dividends they are likely to receive, compute tax liability on them, and pay advance tax.

If an individual doesn’t pay advance tax, he is liable to pay 1% simple interest per month for a period of three months on the amount of shortfall.

“Traditionally, domestic companies paid the tax on dividend before giving it to shareholders. It was changed in the earlier budget, and investors receiving dividends on or after 1 April 2020 were required to pay tax on it. Due to this, they were also subjected to pay advance tax on dividend income,” said Naveen Wadhwa, deputy general manager, Taxmann, a research and advisory firm.

However, the timing and quantum of dividend to be distributed to the shareholders primarily depends on the discretion and decision of the company, while individual taxpayers hardly have any visibility on how much they expect to receive as dividend.

The government should have excluded dividend income from advance tax when it decided to tax it. In the latest budget, the finance minister has proposed to rationalize it by removing the interest charged on the shortfall.

According to experts, now investors must pay advance tax on dividend in the subsequent quarter of receiving it.