In spite of such reduction and rationalisation in corporate tax, income tax as well as GST in the recent past, the Central Board of Direct Taxes data says the tax collection for 2025-26 as on 17 December 2025, has gone up substantially and the advance tax for the current year too has grown significantly.
When the tax collection goes up due to a better economy and better compliance, it’s the duty of the government to reward honesty. And that reflects in the lowering of tax slabs. Quite a lot have been done in the last few years for the middle class. However, in this process of simplification, some exemptions or deductions encouraging risk-taking were also removed.
Idea behind tax-free dividends
For example, take Section 80L of the Indian Income-tax Act, 1961. This section earlier allowed deductions on dividend income subject to a limit. Later, this was removed in 2006. However, dividends paid by the companies were made tax-free in the hands of the investors, large or small. Removal of Section 80L did not affect the investors. This was because dividend distributed is already taxed on the company by way of Dividend Distribution Tax (DDT) introduced in 1997, in addition to the corporate income tax paid on the same income.
The problem with DDT is that it was taxing the promoters with huge holdings and large shareholders receiving huge dividends equally as retail shareholders. Hence, the DDT was abolished in 2020. It is a progressive measure to tax the shareholders according to their income levels and the applicable income tax slab; fair enough. But this was done without reintroduction of Section 80L. With buy back also being treated as dividend income, even a small investor in a good year has to pay higher taxes. Many senior citizens who don’t mind taking calculated risks are affected by this as it discourages long-term investments.
Government Measures
To encourage risk capital and compensate for the risks taken, the government may also include dividend income under section 80 TTA (which currently provides a deduction of Rs 10,000 on interest earned from savings account) and section 80 TTB (which currently allows a deduction of Rs 50,000 on interest income for senior citizens).
The limits can be raised to Rs 25,000 and Rs 75,000, respectively. Alternatively, dividend income can be treated as long term capital gain (LTCG), similar to that of bonus shares or stock split and the exemption threshold can be increased to Rs 1.50 lakh per annum from the existing Rs 1.25 lakh per annum.
The government can abolish the securities transaction tax in case of delivery-based spot trades since LTCG is reintroduced. Treat all long-term rated long-term debts, including fixed deposits with banks, as the same and make them eligible for LTCG / STCG benefits, which may increase the deposit growth in banks and enable them to increase credit growth at reduced lending rates for MSMEs and others.