What is a Dividend Distribution Tax?
Dividend Distribution Tax is the tax paid on dividends distributed by a company to its shareholders. A Domestic Company must pay DDT as per the provisions of Section 115O of the Income Tax Act. Since the Company pays DDT, the dividend income is exempt in the hands of the shareholder under Section 10(38). Under Budget 2020, the Finance Minister abolished DDT. As a result, the dividend income is now a taxable income in the hands of the shareholder. DDT would not be applicable to any dividend paid on or after 1st April 2020.
- A Domestic Company was liable to pay DDT Tax as per Section 115O.
- The company should pay DDT within 14 days from the date of declaring, distributing or paying the dividend whichever is the earliest.
- If the Company does not pay dividends within 14 days, interest at a rate of 1% is payable by the Company from the date on which DDT was payable up to the date of payment of DDT to the government.
Union Budget 2021 Update
After the abolishment of DDT under Budget 2020, dividend which was earlier exempt now became a taxable income. Under Budget 2020, the finance minister introduced TDS under Section 194 and Section 194K for deduction of TDS on dividend paid on equity shares and equity mutual funds. Under Budget 2021, dividend paid to REIT / InvIT is now exempt from TDS.
Advance Tax liability would arise on dividend income only once the dividend is declared or paid since it is difficult for the shareholders to estimate the dividend income accurately.
DDT – (Dividend Distribution Tax) Rate
A Domestic Company distributing or declaring dividends should pay DDT at 15% on the gross dividend as per Section 115-O of the Income Tax Act. Since the DDT is calculated on Gross Dividend, the effective rate comes to 17.65%.
Example on DDT
A Domestic Company declares a dividend of INR 5,00,000 on 10th April 2019. Calculate DDT that Company should pay.
- Calculate Gross Dividend
Gross Dividend (100%) = Net Dividend (85%) + DDT (15%)
Gross Dividend = INR 5,00,000 * 100/85 = INR 5,88,235.29
- Calculate DDT on Gross Dividend
DDT = Gross Dividend * 15%
DDT = INR 5,88,235 * 15% = INR 88,235
Note: Thus, the effective DDT rate is 17.65%. Further, the above rate does not include cess and surcharge. After calculating cess and surcharge, the effective rate is 20.56%.
Abolishment of Dividend Distribution Tax
Under Budget 2020, the Finance Minister abolished Dividend Distribution Tax i.e. DDT. A Company is no longer liable to pay DDT. As a result, the dividend income which was earlier exempt up to INR 10 lacs, now became taxable for the investors. Such dividend income would be taxable at slab rates. Since the dividend income is taxable, TDS becomes applicable on such Income. The Finance Minister also introduced a new TDS section for TDS on dividend – Section 194K (TDS on Dividend from Equity Mutual Funds) and amended the existing Section 194 (TDS on Dividend from Equity Shares).
Dividend income from a foreign company is a taxable income. The investor should report it under the head Income from Other Sources. The income tax on dividend income is as per slab rates. The provisions of DDT or TDS are applicable to a Domestic Company only.
Upto FY 2019-20, a Domestic Company was liable to pay DDT at 15% on the Gross Dividend. On the other hand, Dividend was an exempt income for the shareholders.
To provide relief to the Domestic Companies and boost foreign investments, DDT was abolished under Budget 2020. Since the tax on distribution of dividend was removed, the dividend income became taxable for the shareholders. Thus, for any dividend declared or paid on or after 1st April 2020, it is taxable in the hands of the shareholder. The Company is also liable to deduct TDS as per Sec 194 or Sec 194K.