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Reviewed by Sep 25, 2022| Updated on
An equity shareholder receives a dividend, which is the return of the profits earned by the company in a particular year. The dividend is considered as the income in the hands of the shareholders accordingly, it should attract income tax.
But the Indian income tax laws provide respite to such individual assessees by exempting the specific dividend income to a certain extent. The primary reason to do so is the levy of Dividend Distribution Tax (DDT) on the corresponding companies. The exemption helps tax assessees avoid double taxation of the same income, i.e. in the hands of the company as well as the shareholder. The DDT provisions are governed by Section 115-O of the Income Tax Act.
Any domestic company in India, which declares or distributes dividend, must pay DDT at the rate of 15% on the gross amount of dividend. These provisions are laid down in Section 115-O. Consequently, the effective rate of DDT sums up to 17.65%. This rate excludes surcharge and cess. The rate arrived at after including the surcharge and cess would be 20.56%. A different rate has been prescribed for Dividend Distribution Tax for dividends defined in Section 2 (22) (e) of the Income Tax Act. In those cases, the tax rate is increased from 15% to 30%.
Let us understand the computation of value for calculating tax with the help of an example. Suppose dividend declared is Rs 2,00,000 for a year. The company should gross it up by multiplying 7.65% with the dividend amount, Rs 2,00,000. The resulting figure is added to Rs 2,00,000 to arrive at Rs 2,35,300. This amount shall be assessable value to calculate DDT.
DDT must be paid within fourteen days from the date of declaration, distribution, or payment of dividend, whichever is the earliest. If a corporate assessee fails to pay the DDT to the department within 14 days, an interest liability surfaces at the rate of 1% of the DDT liability. The period to calculate the interest amount shall be considered from the date following the date on which such DDT was due till the date such DDT is paid to the credit of the taxman. The provisions governing this are contained under Section 115P of the Income Tax Act.