Section VI: Income Tax and Your Financial Planning

• Ques: Dividend gives tax free regular income for life plus tax free wealth for children too
• Ans: Dividend is the key to tax-free income. Key points:
  • DIVIDEND YIELD - invest in a share of a company that pays a high dividend per share for at least last 5-7 years regularly.
  • Dividends are tax free in the hands of recipients.
  • Dividend yield is the return on investment in one share on prevailing price. For example if company pays annual dividend of Rs. 5 and the value of share in the market is Rs. 50 per share than the dividend yield will be 10% p. a.
  • Dividend paying company means a company which is generating strong cash flow but has no fast growth plans. These are generally big companies which have tested all the seasons hence relatively safer bet for investing in equity.
  • DIVIDEND IS DARLING OF INVESTOR IN DEPRESSED MARKETS.
  • There is dividend income for life and thereafter you can leave a fortune for children through nominations.
  • Equity shares are also exempt from wealth tax.
  • Liquidity - Most of the dividend paying companies are eligible for loan against shares list of various banks hence one gets immediate liquidity up to 50% of share value for emergencies.
  • Dividend income is real income whereas appreciation in share value is notional.
  • No TDS like KVP, fixed deposit or RBI Bonds.
  • While investing in equities for dividend yield is wise, but it is not risk free. Gauging risk as per individual is must. ITS TAX FREE NOT RISK FREE.