A dividend is a return on investment or profits earned by domestic companies in a given financial year. Dividend Distribution Tax (DDT) is paid by the companies to the Government on dividends paid to their investors and shareholders. Section 115-O of the Income Tax Act deals with Dividend Distribution Tax.
This post breaks down Dividend Distribution Tax down to its minute details. Read on to get a comprehensive idea of DDT and its various aspects.
What is Dividend Distribution Tax (DDT)?
Dividend Distribution Tax is levied on domestic companies that distribute dividends or profits earned to their investors and shareholders in a particular year. However, the income obtained as a dividend from domestic companies is exempted from taxation as per the Income Tax Act of India. Notably, this tax is also levied on income received from mutual fund investments.
DDT Applicability on Mutual Funds
Dividend distribution tax can also be applicable to mutual funds. The DDT for debt-oriented funds stands at 25% or 29.12%, including cess and surcharge. For equity-oriented funds, the dividend distribution tax rate is 10% as introduced by the Union Budget of 2018. This dividend distribution tax rate would stand at 11.648% with surcharge and cess.
Who Should Pay Dividend Distribution Tax?
As per Section 115-O of the Income Tax Act, all domestic companies are liable to pay a 15% Dividend Distribution Tax on the gross dividend amount. Under Section 2(22)(e) of the Income Tax Act, the DDT is 30%.
When is Dividend Distribution Tax Applicable?
The Dividend Distribution Tax is applicable when:
- A dividend is declared.
- A dividend is paid.
- A dividend is distributed.
Dividend Distribution Tax Rate
Domestic companies distributing or declaring dividends to their shareholders need to pay the dividend distribution tax at a 15% rate on the amount it pays as dividend as per provisions mentioned in Section 115O. The effective rate is, however, 17.65% (this rate excludes surcharge and cess).
Although the applicable dividend distribution tax rate under Section 115O is 15%, for dividends, as referred to the Section 2(22)(e) of the IT Act, the dividend distribution tax rate stands at 30%. To have a better understanding, let’s take a look at how to calculate DDT in the following section.
How to Calculate Dividend Distribution Tax
Let’s say that, a company has declared a dividend that amounts to Rs. 3,00,000. In order to find the DDT on this dividend amount, you have to calculate the grossed-up dividend.
Step 1: Calculate 17.65% of Rs. 3 lakh and then adding it with Rs. 3 lakh. The grossed-up dividend is equal to Rs. 3,52,950.
Step 2: Next calculate 15% of Rs. 3,52,950. This will amount to Rs. 52,942.50.
The DDT on Rs. 3 lakh would be Rs. 52,942.50.
Time Limit for DDT Payment
As per mandates of the IT Act, a company has to pay the necessary dividend distribution tax within 14 days of distribution, payment or announcement of dividend (whichever is earliest).
If a company fails to pay DDT within this timeframe, it will have to pay an interest of 1% of the amount of DDT. The interest calculation will take place from the date immediately after the due date of DDT payment till the date on which the company pays its DDT. The provisions regarding delayed payment of DDT are available under Section 115P.
Is DDT Abolished for Domestic Companies?
Up to Assessment Year 2020-2021, the investors were exempted from paying dividend tax. However, the Finance Act 2020 abolished DDT for domestic companies. Meaning, for all dividends earned after 1st April 2020, the tax is payable by the investor and not the domestic companies.
After the abolition of the Dividend Distribution Tax, here’s a list of new changes to keep in mind:
- Tax is levied on shareholders on the dividend earned.
- For AY(2021-2022), exemption under Section 10(34) is no longer applicable.
- Section 115BBD is no longer applicable.
- Tax is deducted under Section 194 at the rate of 10% if the dividend amount is more than Rs. 5000.
TDS Deducted on Dividends
After the abolition of the Dividend Distribution Tax, TDS (Tax Deducted at Source) at 5% for dividend income over Rs. 5000 in a given financial year. The companies distributing dividends will deduct TDS before transferring the amount to the investors and shareholders.
How is Dividend Income Taxed?
- Hindu Undivided Family, individuals, private trusts, or any partnership firm earning an income of more than Rs. 10 lakh through dividend is liable to pay a 10% tax.
- Companies will have to pay the DDT in addition to the regular income tax liability, and they cannot claim any deduction on the DDT amount.
- Deductions regarding any expenses, allowances, set-off of any loss are not applicable while calculating dividend distribution tax.
- As per Section 115BBD of the Income Tax Act, domestic companies earning a dividend from foreign subsidiaries have to pay a concessional 15% tax on the dividend.
How do Dividends Affect Net Asset Value (NAV)?
NAV is impacted if the dividends are reinvested. NAV is calculated by dividing the value of funds by the number of outstanding shares of the fund. However, if the fund distributes dividends to the shareholders, the NAV declines. Meaning, that every time dividends are paid to the shareholders, the NAV declines. Investors must keep this in mind before investing in shares and mutual funds of a domestic company.
Should You Invest in Dividend Paying Domestic Companies?
If you want to enjoy the double benefit of regular income and value appreciation, you may invest in dividend-paying stocks and mutual funds. They also provide a hedge against inflation and are considered safer than growth stocks.
Should You Reinvest Dividends?
If you want to grow wealth over time, you can consider reinvesting the dividends. Reinvesting helps you buy more shares and increase the value of your investment instead of withdrawing cash. However, if you are investing in debt mutual funds for more than 3 years, it would qualify for long-term capital gains tax at the rate of 20%. Before dividing to reinvest your dividend income, talk to a financial advisor to get the maximum benefit.
Also Read: Differences Between Taxes On Long-Term and Short-Term Capital Gains
Difference Between Dividends And Capital Gains
|Profits earned by a company, which is distributed to the investors.
|Profits gained after selling investment or capital.
|Dividends are distributed periodically.
|Capital gains can be made every time capital is sold.
|An investor has no control over the dividends earned.
|An investor has control over the capital gains earned.
|The investment requirement is comparatively less.
|The investment requirement is high.
Also Read: Best Dividend Paying Mutual Funds
Dividends offered by a domestic company were exempted in the hands of shareholders until AY 2020-21. Companies had to pay the required DDT. However, this has changed with the Finance Act 2020, which has eliminated DDT for domestic companies. In other words, now dividends are taxable in the hands of all investors.
FAQs on Dividend Distribution Tax
Q1. What are the different types of dividends?
Ans: A company pays dividends to its shareholders on the basis of its financial performance. There are two types of dividends: interim and final. Companies pay interim dividends any time between two annual general meetings. The final dividend is paid only after it is approved in the AGM.
Q2. Is there a TDS deduction on dividends?
Ans: Yes, TDS deduction is applicable on dividend income since the Finance Act of 2020 abolished DDT. If your dividend income is more than Rs. 5,000 for one financial year, there will be a TDS deduction of 10%. Companies providing the dividend will deduct the TDS.
Q3. Do I have to pay taxes on dividends earned from foreign companies?
Ans: Yes, you are liable to pay taxes on a dividend income you receive from a foreign company. This amount will be charged under the ‘Income from Other Sources’ head. This dividend amount will be added to your total income, and you will have to pay taxes at the tax slab rate applicable to you.
Q4. Which are some of the IT Act sections regarding DDT?
Ans: There are three sections of the IT Act consisting of relevant provisions regarding dividend distribution tax. These are as follows:
Section 115P: Deals with the penalty for delayed payment of DDT
Section 115O: Provisions regarding tax on profits distributed by a domestic company
Section 115Q: Provisions about when a company is declared to be in default
Q5. What to do in case of double taxation on dividends from a foreign country?
Ans: In case individual taxpayers end up paying tax on dividend income twice (once in India and once in the country of the foreign entity), they can seek double taxation relief. They can claim relief as per DTAA (Double Taxation Avoidance Agreement) between India and the said country. If such an agreement doesn’t exist, they can claim relief under Section 91.
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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I am a financial expert with extensive knowledge in taxation and investment strategies. My expertise in these areas is demonstrated through years of experience in advising individuals and businesses on tax planning, investment management, and financial planning. I have a deep understanding of the intricacies of tax laws, including the Income Tax Act of India, and I am well-versed in the concepts of dividends, Dividend Distribution Tax (DDT), and their implications on various financial instruments.
Now, let's delve into the key concepts mentioned in the provided article:
1. Dividend and Dividend Distribution Tax (DDT):
- Dividend: A return on investment or profits earned by domestic companies, distributed to investors and shareholders.
- DDT: A tax paid by companies to the government on dividends distributed to investors and shareholders.
DDT Applicability on Mutual Funds:
- DDT applies to mutual funds, including debt-oriented and equity-oriented funds.
- Rates: 25% or 29.12% for debt-oriented funds, 10% for equity-oriented funds.
Who Should Pay DDT:
- All domestic companies are liable to pay a 15% DDT on the gross dividend amount.
When is DDT Applicable:
- DDT is applicable when a dividend is declared, paid, or distributed.
- Domestic companies pay DDT at a 15% rate on the distributed dividend amount (effective rate: 17.65%).
Calculation of DDT:
- Grossed-up dividend calculation is involved.
- Example: If a company declares a dividend of Rs. 3,00,000, the DDT would be Rs. 52,942.50.
Time Limit for DDT Payment:
- Companies must pay DDT within 14 days of distribution, payment, or announcement of dividends.
Abolition of DDT for Domestic Companies:
- Finance Act 2020 abolished DDT for domestic companies.
- Tax is now payable by investors on dividends earned after April 1, 2020.
TDS on Dividends:
- TDS at 5% for dividend income over Rs. 5000 in a financial year.
- Companies deduct TDS before transferring dividends to investors.
Taxation of Dividend Income:
- Individuals, HUFs, trusts, or partnerships earning over Rs. 10 lakh through dividends pay a 10% tax.
- Companies pay DDT in addition to regular income tax; no deduction on DDT.
Dividends and NAV:
- NAV is impacted when dividends are reinvested; it declines with dividend distribution.
2. Investment Considerations:
Investing in Dividend-Paying Companies:
- Provides regular income and value appreciation.
- Acts as a hedge against inflation and is considered safer than growth stocks.
- Reinvesting helps grow wealth over time.
- Considerations for debt mutual funds and long-term capital gains tax.
Dividends vs. Capital Gains:
- Differences in nature, periodicity, taxation, and investor control.
3. Frequently Asked Questions (FAQs):
- Types of dividends, TDS deduction on dividends, taxation of dividends from foreign companies, relevant sections of the IT Act, and relief for double taxation.
In conclusion, Dividend Distribution Tax (DDT) is a crucial aspect of India's taxation system, impacting both companies and investors. The recent abolition of DDT for domestic companies has shifted the tax burden to investors, necessitating a thorough understanding of the revised tax landscape. Investing in dividend-paying companies requires careful consideration of tax implications, and reinvesting dividends can be a strategic move for wealth accumulation. The article provides comprehensive insights into these topics, offering a valuable resource for individuals navigating the complexities of dividend taxation in India.