Dividend Distribution Tax

The Indian government imposes the Dividend Distribution Tax (DDT) on businesses that pay dividends to their shareholders. However, before paying the dividend to the shareholders, the corporation deducts the tax. This tax is designed to ensure the government gets a fair part of the company's revenues. 

Additionally, all local and international businesses operating in India must comply with the DDT. However, the tax rate may vary the tax rate may vary based on the tax treaty between India and the foreign company's home country.

The DDT is a tax charged on dispersed earnings or dividends that the corporation deducts before a dividend distribution to shareholders. Companies that pay dividends to their shareholders in India were required to pay the Dividend Distribution Tax (DDT). 

The now-abolished DDT required a corporation issuing a dividend to pay the government a tax of 15% on the gross dividend sum by section 115O of the Income Tax Act. Further, according to Section 2(22)(e), tax on presumed profits was due at a rate of 30%, and in this case, the shareholder was excused from paying taxes on the dividend.

Who Has to Pay Dividend Distribution Tax (DDT), and What is The Rate?

The DDT is a tax charged on dispersed earnings or dividends that the corporation deducts before a dividend distribution to shareholders. Companies that pay dividends to their shareholders in India were required to pay the Dividend Distribution Tax (DDT). 

The now-abolished DDT required a corporation issuing a dividend to pay the government a tax of 15% on the gross dividend sum by section 115O of the Income Tax Act. Further, according to Section 2(22)(e), tax on presumed profits was due at a rate of 30%, and in this case, the shareholder was excused from paying taxes on the dividend.

Amendment as per the Finance Act 2020 - Abolition of DDT for Indian Companies

The Dividend Distribution Tax (DDT) has been repealed and abolished by the Finance Minister for Indian corporations under the Finance Act 2020. With this modification, Indian corporations are no longer obligated to pay DDT on dividends paid to shareholders. Instead, shareholders will be forced to pay tax on dividends based on their tax bracket.

This measure is intended to reduce the burden on businesses while boosting the convenience of doing business in India. In addition, the repeal of DDT would also make India a more attractive location for international investors, as it would abolish the double taxation of profits.

Dividends will be taxed by shareholders according to their appropriate tax rate under the new system. For example, if a shareholder is in the 30% tax bracket, the dividend received will be subject to 30% taxation.

When is DDT Applicable?

According to the Income Tax Act, DDT is required to be paid within fourteen days of the earliest following-

  • Declaration of dividend
  • Distributions of dividend
  • Payment of dividend

If, within the due date, the dividend is not paid, applicable interest at the rate of 1% for every month/part thereof on the amount of such tax will be meant to get applied.

The interest will be liable to be paid for the period starting right after the last date on which such tax was payable and the actual payment date.

Dividend Distribution Tax – Special Provisions

According to the requirements of the income tax statute, DDT must be paid within 14 days of the earliest possible date, and if it is not, interest will be charged at a rate of 1% per month or portion thereof on the amount of the tax.

The interest will be paid for the period between the last day on which the tax was due and the actual payment date.

Additionally, DDT is due in the instances of the following-

Payment of Dividend

Declaration of Dividend

Distributions

Dividend Distribution Tax in Mutual Funds

Mutual Funds are also subject to DDT-

  1. DDT is applied to Debt-Oriented Funds at a rate of 25%.
  2. Equity-Oriented Funds, however, were free from DDT. A 10% tax on mutual funds with an equity focus was implemented in the 2018 budget.
  3. Investor Dividends are exempt in the hands of the fund holders

DDT on Private Companies

According to Section 115-O of the Income Tax Act, any domestic firm declaring or distributing dividends will have to pay DDT at the rate of 15% on the gross amount of dividends.

Successive governments have periodically imposed and removed Dividend Distribution Tax according to market conditions. As a result, the dividend distribution tax rates and computation process have also changed.

Considerations for DDT Tax

  • Due to the elimination of DDT, the indirect tax burden previously passed to the shareholders is now straightforward to calculate.
  • Since DDT is no longer in effect, stockholders in lower tax bands can now add the real dividend to their income without having tax deducted at the source. 
  • Dividends received by shareholders whose income is below the taxable threshold are not subject to income tax. However, after receiving dividends for the fiscal year, this is contingent upon their income being below the taxable threshold.
  • DDT must be paid separately from a company's income tax obligation. The corporation cannot deduct or claim credit for the DDT paid.
  • A 15% tax discount is allowed under Section 115BBD for dividends received by an Indian company from its overseas affiliate.
  • If a dividend is paid to someone on behalf of or in the name of the New Pension System Trust, no DDT is due.
  • Under the Act, the taxpayer shall not be permitted to deduct any expenses from income received in the form of dividends, make any allowances,, or set off losses.
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