Dividend payout by corporates to their shareholders will have a 25 per cent lower tax deducted at source. Instead of 10 per cent, the TDS rate will be 7.5 per cent from May 14, 2020 to March 31, 2021.

Dividend is in the list of 23 categories on which the government has decided to lower TDS. The decision on Wednesday comes months after the government scrapped the dividend distribution tax and slapped 10 per cent TDS on dividend, paid by a company or mutual fund to its shareholders or unitholders, if the amount exceeds Rs 5,000 in a year.

Explaining the TDS rate reduction, finance secretary Ajay Bhusan Pandey said, “interest on securities with bank account and dividend payment attracted 10 per cent TDS. Now the rate is lowered to 7.5 per cent. This move is to facilitate more liquidity in the system”.

According to tax experts this reduction should not be confused with lower tax liability as the shareholder has to consider the entire dividend amount while calculating the tax . But he will get a tax credit as TDS has already been deducted.

“Reduction in the rate of TDS will not reduce the tax liability of any taxpayer. In case of shortfall in payment of tax by way of TDS or advance tax, one will be rather liable to payment of interest,” said tax advocate Narayan Jain, adding the finance minister has to give relief to the taxpayers in real terms.

Motor vehicle sales

In addition to dividend, the Central Board of Direct Taxes said TCS (tax collected on source) on the sale of a motor vehicle above Rs 10 lakh has been cut to 0.75 per cent from 1 per cent.

The CBDT said TDS on payment for life insurance policy has been reduced to 3.75 per cent from 5 per cent, while that rent for immovable property has been cut to 7.5 per cent from 10 per cent.

The 1 per cent TDS charged on payment made for the acquisition of immovable property has now been reduced to 0.75 per cent. TDS on payment of rent by individual or HUF has been cut to 3.75 per cent from 5 per cent earlier. TDS on e-commerce participants has also been reduced to 0.75 per cent from 1 per cent.