Looking for high dividend yield companies?

• After Budget 2020 abolished DDT (Dividend Distribution Tax), companies with high Foreign Promoter Holdings will be major beneficiaries

Previous rule

• Before 31st March 2020, companies distributing dividends had to pay tax at an effective rate of 20.56%. Effectively, out of every ₹100 in distributable profits, companies had to cough up ₹20.56 as tax, with only ₹79.44 left for distribution to shareholders.

Benefit for Foreign Promoters

• 'Foreign entities (FPI & FDI) constitute about a third of all ownership in listed stocks in India. This number is even higher for cash-rich dividend paying companies.'
• As the DDT is now abolished, the rate paid by most Foreign Promoters is much lower
• Foreign Promoters will now pay tax on dividends earned in India at either 20% or lower rates, specified in tax treaties inked by their home countries. 
• This rate of 20% would be further reduced where the tax treaty provides for a beneficial lower rate. As seen from the table below, the tax rate on dividends under most tax treaties is 15 percent. These rates can be as low as 5 per cent in some cases, as opposed to 20.56% tax on dividends earlier.

Higher Dividend yields ahead

• Most companies sitting on cash and high foreign holding might see a higher dividend yield. This is particularly true for companies with high Foreign promoter ownership!
• There were 20 multinational companies in NSE 500, with a dividend yield of more than 1% in FY20 (highest being 5.90%) and a majority Foreign Promoter Holding.

INDmoney analysis

• While the high dividend payouts for these companies is great for foreign entities, Resident Indians will have to pay tax on these dividends at your income slab rate.
• If you are in a higher slab rate, it may not make sense to invest in these companies purely for the dividend.