You will now have to pay 14.5% tax on dividend received on LIC policy

Budget 2020 changed the income tax slabs and moved the tax burden on dividend to the recipients. As dividend will be taxed in the hands of the holder, from the next financial year, people with life insurance policies will have to pay tax of about 14.5% on dividends, according to HDFC Securities.

In the existing regime, dividend distribution tax was imposed on companies, which also meant that the investor or policy holder received lesser dividend.

Indian companies, until financial year ending March 2019, have to pay dividend distribution tax at 15% of the aggregate dividend declared, distributed, or paid. An additional 12% surcharge and a 3% education cess take the effective rate to 20.35%.

However, now this tax will be paid by the recipient of the dividend, based on their income levels. Tax on total income of an individual will be payable at these new rates, provided the taxpayer does not avail any exemptions that are available now. 

Budget proposals may deter people from buying insurance because they can avail lower tax rates without making significant investments in insurance. However, since most people buy insurance as a tax saving mechanism, it may also deter them from moving into the new tax slabs proposed by Finance Minister Nirmala Sitharaman.

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