Budget 2018: What Standard deduction and tax on dividend mean for you

In this Budget, a 10 per cent tax has been imposed on the dividend paid by equity mutual funds. Earlier, the dividend was tax-free in the hands of the individual investor.

Budget 2018 had mixed tidings for salaried employees and investors. While the finance minister introduced a standard deduction for all salaried employees, at the same time he raised the cess levied on income tax. For investors, there was also the negative of tax on dividend income from equity mutual funds (beside long-term capital gains or LTCG tax).  

A standard deduction of Rs 40,000 has been introduced for all salaried employees. Suresh Surana, founder, RSM India, explains this is not quite a gift from the finance minister. “Earlier, there was medical reimbursement of Rs 15,000 and a transport allowance of Rs 19,200. Together, they amounted to Rs 34,200. Both have been taken away and in lieu the standard deduction has been introduced,” he says. According to Deepesh Raghaw, founder, PersonalFinancePlan.in, a Sebi-registered investment advisor: “Now salaried employees won’t have to produce bills. The net gain in terms of higher deduction is only Rs 5,800.”


 

Earlier, salaried employees paid education cess and a secondary and higher education cess, amounting to three per cent of income tax, and a surcharge. Now, they will have to pay a health and education cess of four per cent. 

What is the net impact of the standard deduction and the cess? If you earned Rs 5 lakh in FY18, you would have paid tax of Rs 12,875. With the same income in FY19, your tax will go down to Rs 10,618, so there will be a net saving of Rs 2,456, say experts.

Investors will now have to also pay a 10 per cent tax on dividend from equity mutual funds, which was tax-free earlier. “This has been imposed to do away with arbitrage opportunities. With 10 per cent tax being imposed on LTCG, investors would have gone for the dividend option of equity funds if dividend was not taxed,” says Raghaw. He adds that there is still a slight benefit in the growth option of equity funds: Tax will only be imposed on LTCG gains above Rs 100,000, whereas taxation of dividend will begin from anything above zero.

While LTCG and dividend tax are negatives for equity fund investors, Chandresh Nigam, managing director and chief executive officer, Axis Mutual Fund, says: “Since equity instruments still attract the lowest rate of tax, this asset class will continue to see good flows.”