Dividend Distribution Tax

What is dividend distribution tax (DDT)?

When companies distribute to its shareholders, a share of the profits earned in a particular year, it is called Dividend. A dividend comprises of income of the shareholders, which is typically subject to income tax.

Under this scenario, the IT laws of India have provisions for exempting dividend income gathered from Indian enterprises through investors in a levy called the Dividend Distribution Tax (DDT) upon the enterprise which is paying this dividend. DDT provisions are controlled by IT Section 115O.

Dividend Distribution Tax Rate

Any Domestic enterprise or company which is distributing dividend needs to pay DDT @ 15% on the gross dividend amount as per Section 115O. Keeping this in mind, the effective DDT rate is @ 17.65%* on the amount of dividend.

For instance, DDT on dividend of INR 2,00,000

Determine the grossed-up dividend. Summed @ 17.65% on INR 2,00,000 and added to INR 2 lakhs goes up to INR 2,35,300
Calculate DDT on the Grossed-up Dividend @ 15% which will amount to INR 35,295

Along this trend, DDT on INR 2 lakhs will settle at INR 35,295.

When is DDT to be paid?

DDT needs to be payed out within 2 weeks, i.e. 14 days of declaration of dividend or payment of dividend, whichever of these happens first. When the non-payment is within 2 weeks, in case of default, the maximum amount of penalty under Section 271C is the amount of tax which the taxpayer failed to deduct or pay as required. Provisions ensured along IT Section 115P.

DDT on Mutual Funds

When it comes to debt-oriented funds DDT is @ 25 %.
Equity-oriented funds are not subject to DDT. In budget 2018, tax on equity mutual funds is @ 10 %.
All dividend gathered by the investor is exempt for the fund holder

How is Dividend Distribution Tax Calculated?

Sum of dividend distributed is bracketed @ 85% and can go up to 100%. This is when 15% is applicable on the gross amount.

For instance, Dividend distributed is 100
Grossing up of dividend [100/85*100] = 117.65 DDT @ 15% on 117.65=17.65
Surcharge @ 10%=1.76
Education cess @ 3%=0.58
Effective tax rate of 19.994% on INR100.
This can be subject to deduction along 115-O(1A) on dividend from subsidiary.

Frequently Asked Questions

What is the tax rate on dividends?

The Government of India puts a Dividend Distribution Tax @ 20.36%, inclusive of 15% tax + cess-surcharge while the enterprise gives dividend to shareholders. Yet, dividends are given exemption for recipient shareholders.

Do I have to pay tax on dividends?

In our country an enterprise that has declared, distributed or paid any amount as dividend needs to pay out DDT at 15%. The DDT provisions were introduced through the Finance Act of 1997. Domestic companies alone are liable for this tax.

Is dividend distribution tax a form of double taxation?

Gains of a company become the shareholder’s income. This is how they become partial owners as shareholders have already paid a tax. This way DDT is a kind of double taxation. Since the Indian enterprises are as it is paying quite high corporate tax on these profits, the shareholder’s status goes down further.

What is dividend distribution?

It is the segment of a company’s profit which goes as distribution to the shareholders. Though dividend is a tax-free issue for the shareholders, the enterprise has to pay tax on the dividend distributed. DDT is the levy on the amount distributed by the enterprise as dividend. DDT came to form under the Finance Act 1997 along the Section 115-O under Chapter XII-D of ITA, 1961.

Is dividend from mutual fund taxable?

It has been stated a 10% tax on dividends given out by the equity-oriented mutual funds as a segment of its total tax levy made on equity investments.

Is dividend an expense?

No. The dividend is not an expense nor a loss. This means, dividends declared and paid are not within the calculation of the net income shown on the income statement. Dividends declaration by enterprises are stated as changes for retained earnings -stockholders equity.

Who all have to give the Dividend Distribution Tax?

All Domestic enterprises and companies declaring dividend have to pay out DDT @ 15% on the grossed-up amount of dividend as made compulsory under Section 115O.