VR Logo

Dividends on Equity Funds to be Taxed

Direct Tax Code proposes 5 per cent dividend distribution tax on equity mutual funds and ULIPs

Tax-free dividends on equity mutual funds would be a thing of past once the Direct Tax Code (DTC) comes into effect from April 1, 2012. The Direct Tax Code Bill, tabled in Parliament on Monday by Finance Minister Pranab Mukherjee, proposes a 5 per cent dividend distribution tax on equity mutual funds and unit-linked insurance plans (ULIPs). At present, dividends on equity mutual funds are tax-free.

The DTC also proposes a 15 per cent dividend distribution tax (DDT) on equities. However, it has excluded the dividend paid by a subsidiary company to its parent company from any tax liability. Jagannadham Thunuguntla, head equity, SMC Capital, said this exemption make sense as dividend paid by a subsidiary to its parent company means the dividend stays within the group.

The new tax law proposes to increase the income tax exemption limit from Rs 1.6 lakh to Rs 2 lakh. It also proposes three income tax slabs – 10 per cent on Rs 2-5 lakh annual income, 20 per cent on Rs 5-10 lakh and 30 per cent on annual income upwards Rs 10 lakh. At present, income between Rs. 1.65 lakh and Rs 5 lakh is taxed at 10 per cent tax, income for Rs 5-8 lakh is taxed at 20 per cent and above Rs 8 lakh, the tax rate is 30 per cent.

No higher limits for women
The tax code has brought in equality in terms of tax paid by men and women. Now, women would no longer be given higher exemptions as is the case now. The Rs 2 lakh exemption limit is same for both men and women. Senior citizens, however, would enjoy tax exemptions up to Rs 2.5 lakh annual income.

Fewer savings instruments under Section 80 (c)
Investments in equity-linked savings schemes (ELSS), ULIPs and bank fixed deposits would no longer be eligible for income tax deductions under Section 80 (c). The ambit of Section 80 (c) has been limited to fewer savings instruments such as provident fund (PF), public provident fund (PPF), new pension schemes and other approved funds.
Deductions up to Rs 50,000 would be available on premium paid for term life insurance and health insurance, and children’s tuition fee. The deduction of Rs 1.5 lakh interest payment on home loans taken by individuals will continue.

DTC has linked the short-term capital gains tax to an investor’s annual income. A short-term capital gains tax of 5 per cent would be applicable for an investor in the income group of Rs 2-5 lakh, 10 per cent in the Rs 5-10 lakh bracket and 15 per cent for those with income over Rs 10 lakh.

However, DTC has maintained the status quo on securities transaction tax (STT) and long-term capital gains tax, that is, while STT stays, there would be no long-term capital gains tax on equity and equity related instruments. The original draft of DTC had proposed to do away with STT and levy long-term capital gains tax.

The new code proposes a 30 per cent corporate tax against the existing effective rate of 33.22 per cent on account of cess and surcharges. The DTC seeks to impose a minimum alternate tax (MAT) of 20 per cent of the book profit against the existing 18 per cent.

Earlier, the Direct Tax Code was supposed to come into effect from April 1, 2011, but now it has been deferred by a year.