Government may levy income tax on dividends

Your tax liability may see a steep rise in the coming years with the finance ministry reviewing the definition of income to consider bringing in new heads like dividends under its scope.

Income from dividends, which is at present taxed in the hands of the companies, could soon be added to your income and you may have to shell out the applicable income tax. That is just one of the additions which are in works.

But the good news is that the EET (exempt-exempt-tax) method of taxation — which would have resulted in individuals having to shell out tax on interest earned on instruments like Public Provident Fund and post office deposits, or for that matter returns on mutual funds — is not on the taxman's radar for now.

There are also indications that the government may, notwithstanding finance minister P Chidambaram's reiteration to the contrary on Wednesday, go slow on the move to scrap tax exemptions.

Besides dividend, sources in the government point out, there may be other items too which could be added to your income. But it's still too early for North Block officials, having just got the budget out of the way, to get down to work on the new direct tax code.

"We are looking at all the aspects. How we treat income from dividend and how we define income will be reviewed,"
said a senior source involved with the review of the Income Tax Act.

On EET, it's a reprieve for taxpayers. While the finance ministry received an expert committee report last year, it has decided against burdening the direct tax code with politically contentious issues. "Putting EET in the new direct tax code will shift attention from simplifying the norms," an official said.

Besides, sources pointed out, tax benefits to encourage savings are allowed in other countries too.