Dividend Distribution Tax
Dividend distribution tax is the tax levied by Indian Government on Indian companies according to the dividend paid to a company’s investors. At present, the Dividend Distribution Tax is proposed to be removed by government in Financial annual statement 2020 according to the Union Budget of India.
The company has to deposit DDT within the 14 days of declaration, distribution or payment of dividend whichever is the earlier. In case of any non-payment within 14 days, the company shall have to pay interest at the rate of 1% of the DDT.
As per the existing tax provisions, income from dividends is tax free in the hands of the investor up to Rs10,00,000 and beyond than tax is imposed @10 percent beyond Rs10,00,000. Further the dividends from domestic companies are tax-exempted, dividend from foreign companies are taxable in hands of investor. However, this is not to say that there is no tax imposed at all. On the contrary, there is a impose of 15.00% of the dividend declared as distribution tax (Under the Income tax Act, 1961). This tax is paid out of the profits/reserves of the company declaring the Dividend. Moreover surcharge of 12% on DDT and education cess of 4% is imposed.
From 2016, the investors (resident in India) earning dividends above Rs10 lakhs per annum will have to pay an additional tax of 10%.
The Mutual fund companies also have to pay DDT. The rates are as under: a) On Debt oriented funds – DDT shall be 25%. b) Equity-oriented funds – DDT shall be 10%. (Earlier this was exempted This tax has been made applicable from Budget 2018).
1. Who is required to pay the Dividend Distribution tax(DDT) and at what rate?
Any private company which is declaring/distributing dividend is bounded to pay DDT at the rate of 15% on the gross amount of dividend as mentioned under the Section 115. So the effective rate of DDT is 17.65% on the amount of dividend. Dividend distribution tax (Sec115 O) is 15% but in case of any dividend referred to in Section 2(22)(e) of the Income Tax Act, it has been raised from 15% to 30%. Let us understand this with the help of an example:
Calculate the DDT on dividend declared of Rs2,00,000
Determine the grossed up dividend. This is calculated @17.65% on Rs2,00,000 and added to Rs2 lakhs which will amount to Rs2,35,300
Calculate DDT on the Grossed up Dividend @15% which will amount to Rs35,295
Therefore the DDT on Rs2 lakhs will be Rs35,295.
2. When is DDT to be paid?
DDT is to be paid within the 14 days of declaration, distribution or payment of dividend whichever is the earliest. In case of any non-payment within 14 days, the company would be liable to pay by the way of interest at the rate of 1% of the DDT from the date following the date on which DDT was payable till the time such DDT is ultimately paid to the government. These provisions are contained under Section 115P.
a) Income by way of dividend in excess of Rs10 lakh would be chargeable at the rate of 10% for individuals, Hindu Undivided Family(HUF) or partnership firms and private trusts.
b) When a holding company receives any dividend from its subsidiary company (both being domestic companies), then when the holding company distributes the dividend, amount of dividend liable for DDT will be equal to:
Dividend declared/distributed/paid during the whole year
(Less): Dividend received by holding company during the whole year
4. DDT on Mutual Funds
DDT is also applicable on the mutual funds:
a) On Debt Oriented Funds DDT is at the rate of 25% (29.12 % including surcharge and cess).
b) However, Equity Oriented Funds were exempted from DDT. Budget 2018 introduced, tax on equity oriented mutual funds at the rate of 10% (11.648% including surcharge and cess).
c) The dividend received by investors is exempted in hands of the fund holder.
5. Impact on the investor
Mutual funds that invests 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 any 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 payments of Dividend. Dividend schemes will be non-beneficial for LTCG below Rs.1 Lakh as other schemes are exempted from tax.
DDT is payable separately, over and above the Income tax liability of any Company. No deduction or credit is allowed to the company for the payment of DDT. No DDT is payable, if the dividend is paid to any person for or on behalf of the New Pension System Trust.
Section 115BBD provides the concessional rate of tax of 15% on dividend received by any Indian Company from its foreign subsidiary. Moreover, 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.