How are NRIs impacted with the removal of Dividend Distribution Tax?

With effect from 1st April 2020, the dividend distribution tax at the company and the mutual fund level have been abolished and the dividend will be taxable in the hands of the investors.

The company will pass on the full dividend to the shareholders which will be taxable in the hands of the investor as per their tax slabs. This move would benefit the NRIs in the lower tax bracket and impact the NRIs in higher tax brackets (more than 20%) who would require to shell out more tax than earlier. One plus point here would be that NRIs can avail of the Double Tax Avoidance Agreement under the new regime (if India has signed DTAA with your residing country) to lower their tax burden. DTAA has dividend withholding tax in the range of 5-15% subject to certain conditions. This would benefit the NRIs in the higher tax bracket by paying lower tax amounts.

However, now the even the mutual fund will credit full dividend proceeds in the investor account without deducting any taxes which would be taxable in the hands of the NRI. With this, the dividend pay-out mutual fund options may become little costlier and complex from the taxability perspective and may shift the focus of mutual fund investment from dividend pay-out options to growth pay-out options to avoid these issues.