Tax to be paid on the distribution of dividends by a company to its investors is knowns as Dividend Distribution Tax (DDT).
The dividend is distributed by companies as a return on the investment made by investors out of the profits earned by the companies. Since dividend as a return on investment is an income in the hands of investor it is taxable.
Hence tax is levied on the distribution of dividend which is an income.
Dividend Distribution Tax is levied on income earned by shareholders but paid to the government by companies on behalf of the shareholders
In this article
When Is The Dividend Distribution Tax (DDT) Paid?
Dividend Distribution Tax (DDT) is to be paid within 14 days of declaration, payment or distribution of dividends to the investor whichever is earliest.
Also Read: The Concept Of Taxation In Mutual Funds
In the case of default interest at the rate of 1% on DDT is levied on the company from the date DDT was payable till the actual date of payment of DDT to the Government.
Grossing Up Of Dividend Distribution Tax
As per section 115O, Dividend payable must be grossed up for the purpose of payment of Dividend Distribution Tax. Let us understand this concept with the help of an example.
DDT is levied on dividend income which is payable by the company on behalf of the shareholder. Now say face value of the share is Rs 1000 and the company declares a dividend of 10% on face value amounting Rs.100.
The dividend of Rs 100 must be passed net of DDT to the shareholder.
Company needs to gross it up by using DDT 15% + surcharge of 12% (on amount of DDT) + 3% of cess =15(DDT) +1.8(15*12%-surcharge) + 0.504(16.8*3%) =17.304%
Dividend declared must be net of tax by deducting 17.304% So above dividend should be (100%-17.304%) = 82.696%. Dividend of Rs 100 is grossed up i.e. 100% / 82.696%= 120.93 and divided % on gross amount is 20.93%.
Applicability Of Dividend Distribution Tax (DDT) on Mutual Funds
Dividend Distribution Tax (DDT) is applicable on Mutual Funds as well:-
Equity Oriented Mutual Fund– At a rate of 10 percent (11.648 percent including surcharge and cess).
Debt Oriented Mutual Fund– At a rate of 25 percent (29.12 percent including surcharge and cess).
However, dividend received by investors is exempt in the hands of mutual fund holder.
Implications Of DDT On Mutual Fund Investors
For taxation purposes, mutual funds that invest not more than 65% of their corpus in equity are recognized as non-equity-oriented mutual funds or debt-oriented funds
Dividend received is exempt from tax in the hands of investors, but dividends are paid after deducting DDT, which results in reduced net returns in the hands of investors
For equity-oriented mutual fund, DDT of 11.648% (10% tax + 12% surcharge + 4% cess) is deducted and the net amount is paid.
For debt oriented mutual fund, DDT of 29.12% (25% tax + 12% surcharge + 4% cess) is deducted and the net amount is paid.
Tax Provisions Related To DDT
- Dividend income earned in excess of Rs 10 lakh by individuals, Hindu Undivided Family or partnership firms and private trusts would be taxed at the rate of 10%
- When a domestic holding company receives the dividend from its domestic subsidiary company, and the holding company distributes the dividend, amount of dividend liable for DDT will be equal to:
*Dividend declared/distributed/paid during the year minus the dividend received by holding company during the year
*Subject to certain conditions
More Things To Know About DDT
- DDT is paid over and above the income tax liability, no credit or deduction is allowed to the company paying DDT
- If the dividend is paid for or on behalf of New Pension System Trust, DDT is not applicable
- When a domestic holding company receives the dividend from its foreign subsidiary company, the rate of tax is 15% on dividend
- While computing income by way of dividends, no expense, allowance or set-off of losses are allowed to the taxpayer.
To Sum Up
Here is the summary of DDT applicable for mutual fund schemes:-
|FY 2018-19||Residents/HUF||Domestic Company||NRI|
|Equity Oriented Schemes||10%+12% surcharge+4% cess
|10%+12% surcharge+4% cess
|10%+12% surcharge+4% cess
|25% + 12% surcharge +4% cess
|30%+12% surcharge+4% Cess
|5%+12% surcharge+4% cess
|Schemes other than equity oriented and IDF||25% + 12% surcharge + 4% cess
|30% + 12% surcharge + 4% cess
|25%+12% surcharge + 4% cess
Source : Tax Reckoner 2018-19
Disclaimer: The views expressed in this post are that of the author and not those of Groww