The definition of the Dividend Distribution Tax is hidden in its name only. A dividend is a return provided by the company to its shareholders out of the profits made by the company in a particular financial year. Dividend Distribution Tax is the tax levied on the dividend that a company pays to its shareholders out of its profits. DDT is taxable at source and is deducted at the time of the company distributing dividends owing to the law according to which DDT to be levied at the hands of the company, and not at the hands of the receiving shareholder. The DDT related provisions are governed by Section 115O and have been also listed down this page.
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Who has to pay Dividend Distribution Tax (DDT) and what is the rate?
Any domestic company which declares/distributes dividend has to pay DDT at the rate of 15% on the gross amount of dividend as stated under Section 115O. Therefore the effective rate of DDT is 17.65%* on the number of dividends. Dividend Distribution Tax (Sec 115 O) is 15% but in the 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 with the help an example
Let’s Calculate the DDT on the dividend declared of Rs 1,00,000
Step 1: Firstly we determine the grossed-up dividend. This is calculated by determining the value of 17.65% on Rs 1,00,000 and added to Rs 2 lakhs which will amount to Rs 2,17,650
Step 2: Calculate DDT on the Grossed up Dividend @ 15%, i.e. 15% if 2,17,650 which will amount to Rs. 32647.50
Therefore the DDT on Rs 1 lakhs will be Rs 32647.50
*This rate is exclusive of surcharge and cess. If we include the percentages of surcharge and cess also, then the effective rate of DDT would be 20.56%.
When is the Dividend Distribution Tax paid?
The DDT must be paid to the government under 14 days of the dividend declaration, distribution, or the payment; whichever is earliest.
If DDT is not paid within the stipulated time period, an interest rate of 1% per month or part thereof starts getting accumulated until the amount is cleared. The tax is, however, paid separately, over and above the company’s income tax liability.
As per the income tax law, it doesn’t provide for any deduction or credit to the firm for paying the DDT Tax.
In the same way, a taxpayer gets no deduction with respect to any expenditure or allowance or set-off of loss under the Act in calculating the income through dividends.
Dividend Distribution Tax – Special Provisions
The dividend income 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.
When a parent company receives a dividend from its subsidiary company (given that both should be domestic companies), then when the holding company distributes a dividend, amount of dividend liable for DDT will be equal to:
- Dividend declared/distributed/paid during the year
- (Less): Dividend received by the parent company during the year*
(*subject to certain conditions)
DDT on Mutual Funds
- DDT is also applicable to mutual funds; below given are the applicable rates on equity and debt funds
- Equity funds were exempted from DDT. Budget 2018 implemented tax on equity mutual funds at the rate of 10% (11.648 percent inclusive of surcharge and cess).
- For Debt funds, DDT is applicable at the rate of 25 percent (29.12 percent including surcharge and cess).
- The dividend received by investors is exempt in the hands of the fundholder
Do private companies have to pay Dividend Distribution Tax?
As mentioned earlier, according to Section 115-O of the Income Tax Act, any domestic firm which is 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 the market conditions. The dividend distribution tax rates and computation process have also changed over the years.
Union Budget 2020-21 and the Elimination of DDT
However, as per the Union Budget 2020-21, presented by Finance Minister Nirmala Sitharaman, Dividend Distribution Tax has and uses of DDT have been abolished and investors should have to adopt the classical system wherein the dividend shall be taxed in the hands of the recipients at their respective slab rates and firms/companies will no longer be required to pay DDT. It has been abolished at both the company and mutual fund levels. However, the tax shall be deducted at source (TDS) on such dividend incomes in excess of Rs 5,000 per annum at the rate of 10%