A dividend is a return given by a company to its shareholders out of the profits earned by the company in a particular year. Dividend constitutes income in the hands of the shareholders which ideally should be subject to income tax. However, the income tax laws in India provide 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 are governed by Section 115O.
1. Who is required to pay Dividend Distribution tax(DDT) and at what rate?
Any domestic company which is declaring/distributing dividend is required to pay DDT at the rate of 15% on the gross amount of dividend as mandated under Section 115O. Therefore the effective rate of DDT is 17.65%* on the amount of dividend. Dividend Distribution Tax (Sec 115 O) is 15% but in case of dividend referred to in Section 2 (22) (e) of the Income Tax Act, it has been increased from 15% to 30%. Let us understand this by way of an example:
Calculate the DDT on dividend declared of Rs 2,00,000
Determine the grossed up dividend. This is calculated @ 17.65% on Rs 2,00,000 and added to Rs 2 lakhs which will amount to Rs Rs 2,35,300
Calculate DDT on the Grossed up Dividend @ 15% which will amount to Rs 35,295
Therefore the DDT on Rs 2 lakhs 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%.
2. When is DDT to be paid?
DDT is to be paid within 14 days of declaration, distribution or payment of dividend whichever is the earliest. In case of non-payment within 14 days, the company would be liable to pay by way of interest at the rate of 1% of the DDT from the date following the date on which such DDT was payable till the time such DDT is actually paid to the government. These provisions are contained under Section 115P.
3. Special Provisions related to DDT
a) Income by way of dividend in excess of Rs 10 lakh would be chargeable at the rate of 10% for individuals, Hindu Undivided Family or partnership firms and private trusts.
b) When a holding company receives dividend from its subsidiary company (both being domestic companies), then when the holding company distributes dividend, amount of dividend liable for DDT will be equal to:
Dividend declared/distributed/paid during the year
(Less): Dividend received by holding company during the year
(subject to certain conditions)
4. DDT on Mutual Funds
DDT is also applicable on mutual funds:
a) On Debt oriented funds DDT is at the rate of 25 percent (29.12 percent including surcharge and cess).
b) 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).
c) The dividend received by investors is exempt in 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 of 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. Dividend schemes will be non-beneficial for LTCG below Rs. 1 Lakh as other schemes are exempt from tax.
Who should opt for Dividend Scheme?
Investors who are looking for a regular income can invest, despite the higher tax.
If your goal is about wealth creation, dividend scheme would eat up your accumulated profits at regular intervals. Also, the compounding benefit is lost when the dividend is paid and the whole purpose of wealth creation would be a waste.
Despite the new tax regime, equity-oriented funds still dominate because of their high returns. One just has to give some time before taking any hasty decisions.
5. Other important points about DDT
a) DDT is 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
b) No DDT is payable, if dividend is paid to any person for or on behalf of the New Pension System Trust
c) Section 115BBD provides for concessional rate of tax of 15% on dividend received by an Indian Company from its foreign subsidiary
d) Further, no deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the taxpayer under the Act in computing the income by way of dividends.