How much taxes should you pay on dividends?

Dividends are a way to get easy profits, without even having to work in a company. But lot of people have the question of how much taxes does one owe to the government. Here is the easy answer:

ZERO TAXES

Yes, you read that right. Shareholders do NOT have to pay any taxes on dividends earned. That is great right? You get all the profits from the company and you also don’t have to give to the government any share.

But the government wouldn’t give up on such an easy money, right? True. That is why the government asks the company to pay something called a Dividend Distribution Tax (DDT). The company needs to pay a flat 15% DDT on all dividends that it wants to distribute to the shareholders, even before it pays out the dividend. On the 15% DDT, they also need to pay 10% surcharge and an education cess of 3% – leading to a total of 16.995% (FY 2013-14).

You as a shareholder do not have to worry about all this, as the DDT is paid for you by the company directly. So any money you get as dividend in your bank account is tax-free. You may think that it is great, right? Company handles all the taxation and you also get nice profit as an investor.

But remember you do lose 16.995% of your money to the government. Since dividend is calculated on after-tax profit of the company, DDT is an extra expense for your company. Remember, Income tax on profits is 30% (+surcharge +cess) and whenever the company declares dividends, an extra 15% (+ surcharge +cess) is paid.

Almost 50% of your money (earned in the business) is given away to the government whenever you get dividends. That is why there are two kinds of companies:

  1. which gives regular dividends to the shareholders
  2. which retain the maximum profits for developing more value out of the system (best example was Apple when Steve Jobs was alive)

Both of these companies are important and shareholders need to have both types of companies to get the best returns out of his investment. Since, India doesn’t tax dividends in the hands of shareholders, many experts will suggest investing in companies which give regular dividends with high dividend yield. At least you get back some money from your investment – almost like a FD in some cases.

Getting back a nice fat cheque (of Rs. 6 crores) tax-free every year is a good enough reason, if you ask me. And as long as the government uses all this money to improve the infrastructure and for the general public, it is a win-win situation for everyone.

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