Dividend Distribution Tax

A dividend is a return given by a company to its shareholders out of the profits earned by the company in a particular year. Dividends constitute income in the hands of the shareholders, which ideally should be subject to income tax. 

Earlier, the income tax laws in India provided for an exemption of the dividend income received from Indian companies by the investors by levying a tax called the Dividend Distribution Tax (DDT) on the company paying the dividend. The provisions relating to DDT were governed by Section 115O.

Latest Update on Dividend Distribution Tax

In Budget 2020, the Finance Minister abolished the Dividend Distribution Tax (DDT). Now the incidence of dividend income taxation is shifted to investors from the companies.

Who is Required to Pay Dividend Distribution Tax(DDT) and at What Rate?

Any domestic company which is declaring/distributing dividends was required to pay DDT at the rate of 15% on the gross amount of dividends as mandated under Section 115O. Therefore the effective rate of DDT was 17.65%* on the amount of dividend. 

The now-abolished DDT required companies to pay a 15% Dividend Distribution Tax, but this had been increased from 15% to 30% for dividends referred to in Section 2 (22)(e) of the Income Tax Act. 

Let us understand this by way of an example:   
Calculate the DDT on the dividend declared of Rs.2,00,000
Step I: Determine the grossed-up dividend. This is calculated @ 17.65% on Rs.2,00,000 and added to Rs 2,00,000 which will amount to Rs.2,35,300 
Step II: Calculate DDT on the grossed-up Dividend @ 15%, which will amount to Rs.35,295. Therefore, the DDT on Rs,2,00,000 will be Rs 35,295. 

*This rate excludes surcharge and cess. If percentages of surcharge and cess are also included, the effective rate of DDT would be 20.56%.

When is DDT to be paid?

DDT was to be paid within 14 days of declaration, distribution, or payment of dividend, whichever was the earliest. 
If the company did not pay within 14 days, it was liable to pay interest at the rate of 1% of the DDT from the date following the date on which such DDT was payable until the time such DDT is actually paid to the government. These provisions were contained under Section 115P.

Special Provisions Related to DDT

a. Income by way of dividend in excess of Rs.10 lakh was chargeable at the rate of 10% for individuals, Hindu Undivided Family (HUF) or partnership firms and private trusts.

b. When a holding company received a dividend from its subsidiary company (both being domestic companies), then when the holding company distributes a dividend, the amount of dividend liable for DDT was equal to:

Dividend declared/distributed/paid during the year (less) Dividend received by holding company during the year (subject to certain conditions)

DDT on Mutual Funds

DDT applicable on mutual funds: 

• DDT was 25 percent on debt-oriented funds (29.12 percent including surcharge and cess).
• However, equity-oriented funds were exempt from DDT. Budget 2018 introduced tax on equity oriented mutual funds at the rate of 10 percent (11.648 percent including surcharge and cess).
• The dividend received by investors were exempt in the hands of the fund holder

Impact on the investor

Mutual funds that invest less than 65% of the corpus in equity are termed as non-equity funds like debt funds for taxation purposes. Investors who are looking for periodic income from dividends of equity-oriented funds should reconsider their strategy. Because the taxation on returns would leave them with a reduced in-hand return. However, the dividend remains tax-free in the hands of the investor. The fund house will deduct the DDT before any dividend payments. 

Who Should Opt for Dividend Scheme?

Equity-oriented funds might not be the ideal choice for those seeking consistent income despite their attractive returns. Dividend payouts, while tempting, deplete your invested amount and disrupt compounding, hindering long-term wealth creation. In contrast, the new tax regime favors equity's potential for exponential growth, making it the preferred option for wealth-building goals if you invest with a patient and long-term perspective.

Other important points about DDT

• DDT was payable separately, over and above the income tax liability of a Company. No deduction or credit is allowed to the company for the DDT paid
• No DDT was  payable if dividend is paid to any person for or on behalf of the New Pension System Trust
• Section 115BBD provided for a concessional rate of tax of 15% on dividend received by an Indian Company from its foreign subsidiary
• Further, no deduction in respect of any expenditure or allowance or set off of loss was allowed to the taxpayer under the Act in computing the income by way of dividends.

New Provisions of Dividend Taxation

The Finance Act, 2020, introduced in Budget 2020, shifted the dividend tax payment liability from businesses to individual investors. Now your dividend income will be taxed at your income tax slab rate. That means if you fall in the 30% bracket, your dividend income will also be taxed at 30%, irrespective of the total amount.

This new arrangement of dividend taxation imposes a TDS deduction for dividends paid more than ₹5,000. This TDS will be deducted at 10% of the total dividend payment amount. This deduction will be available as a tax credit during IT return filing. You can also submit Form 15G/15H to companies for not deducting any TDS if your total annual income is lower than the tax exemption limit.