Why does investing in dividend-paying companies contribute to better tax planning? Know what the analyst is saying

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– By Raghvendra Nath, Managing Director, Ladderup Wealth Management

Equity investors buy shares of a company with the expectation that their investments will grow in the form of capital gains or earn dividends. Often, investors are unsure whether to hunt for the latest stock market title or whether to consider companies that are consistently profitable and committed to paying dividends for the foreseeable future.

People invest in stocks to generate wealth in the form of capital appreciation and by earning dividends. Thus, companies that are cash-rich and make good profits distribute their profits to shareholders in the form of dividends. It is a type of reward that the company pays to its shareholders when they make a profit. A few companies may offer dividends several times a year. Dividends not only provide income but also accelerate return on investment. Many prominent companies have consistently paid large dividends over the years including Vedanta Ltd., Coal India, Infosys, Reliance Industries, Britannia Industries, Sail and many more.

Because they offer more lucrative returns than low fixed bank deposit rates, these dividend-paying stocks are more attractive than conservative investment strategies. Even when the market is heavily bearish, stocks with high dividend yields are better because they generate regular income and protect the portfolio from the downside. If we look at historical data, we can see that dividend-paying stocks generally outperform other stocks over the long term.

Stock dividend payments are credited directly to your bank account. Two aspects need to be considered. First of all, it must be remembered that companies pay a dividend based on the profits of the company. If for some reason earnings were to drop, those high dividends wouldn’t be there. Consideration of tax implications is an additional factor. Let’s examine this in more detail.

Prior to April 1, 2020, dividends received by shareholders of an Indian company were exempt. So, before making the payment to the shareholders, the company paying the dividends was already paying the dividend distribution tax (DDT). But it wasn’t really tax-free in the literal sense of the word. Regardless of their tax bracket, investors enjoyed the same tax treatment. The small investors paid the tax, which was much more than they would have paid otherwise.

Dividends have been made taxable in the hands of the investor according to their tax bracket in the Union Budget 2020-2021. Investors in lower tax brackets benefit, while those in higher tax brackets suffer the most. The tax burden on dividend income is higher for investors in higher tax brackets. You should also know that the government now levies a withholding tax on dividends (TDS). Dividend income above Rs. 5000 is subject to 10% tax deduction.

Investing in dividend giving aids the investor’s ability to generate consistent streams of income. This sum can also be used to make additional investments in lower level stocks. As a result, there will be more opportunities to grow the money and produce better returns, which will contribute to the creation of wealth.

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