InvestorQ : Should I prefer dividend yield stocks because dividends are tax-free?
Rashi Mehra made post

Should I prefer dividend yield stocks because dividends are tax-free?

Answer
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2 years ago


It is a well-known fact that the Income Tax Act exempts dividends from tax in the hands of the person receiving the dividend. Effectively a person who buys Tata Steel at the price of Rs.200 would earn an effective dividend yield of 5.71% (4%/0.70); assuming a 30% tax rate. This gives you a quick and simple method of comparing the yield on stocks with the yields on other debt instruments like bonds and fixed deposits (FDs). Remember, this tax adjustment is essential because dividends are tax free in the hands of the recipient, whereas interest on bonds and FDs are not. There is one more point to be noted. Dividends are not entirely tax free because dividend payment is a post tax appropriation. Secondly, dividends are paid by the company after payment of dividend distribution tax (DDT) of 15% and only the net amount is paid. Lastly, if your annual dividend income exceeds Rs.1 million then you need to pay tax at 10% on the excess amount. You need to consider these factors before jumping into dividend yields stocks.