Dividend Distribution Tax (DDT) is a tax that governments impose on companies that distribute dividends to their shareholders. It is similar to Tax Deducted at Source (TDS) in the sense that DDT is collected by the company before paying dividends to ensure that the government receives its share of tax revenue from corporate earnings. However, the Dividend Distribution Tax has been abolished from 1st April 2020.
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 taxable in the hands of the shareholder. Dividend distribution tax would not apply 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 the tax was payable up to the date of payment of the same to the government.
Union Budget 2021 Update
After the abolishment of DDT under Budget 2020, earlier exempt dividends now became taxable income. Under Budget 2020, the finance minister introduced TDS under Section 194 and Section 194K for the deduction of TDS on dividends paid on equity shares and equity mutual funds. Under Budget 2021, dividends paid to REIT / InvIT are 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.
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 this tax 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 the DDT that the 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 exempted 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 dividends – Section 194K (TDS on Dividend from Equity Mutual Funds) and amended the existing Section 194 (TDS on Dividend from Equity Shares).
FAQs
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 apply 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 the distribution of dividends 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.
Hey @Rachit_Awasthi1,
Under Budget 2020, the Finance Minister abolished Dividend Distribution Tax i.e. DDT. As a result, dividend became a taxable income. Since it was now taxable, TDS would be applicable on it. Thus, the Budget also introduced the provision to deduct TDS on the dividend.
TDS (Tax Deducted at Source) is applicable to many taxable incomes such as salary, professional fees, interest, commission etc. Since dividend income is a taxable income, TDS is applicable to it.
You can claim the credit of deducted TDS as taxes already paid when you file your Income Tax Return. If the tax liability is more than TDS credit, you need to pay only differential tax. If the tax liability is less than TDS credit, you can claim a refund of the excess amount.
If you have received an email for dividend you can know more about TDS on dividend paid in FY 2020-21 in the article mentioned below.
I am salaried person, gross income 10 lakh and comes in individual resident category. I invested in share market and also get dividend 8000. But i am confused that how much dividend amount is tax-free in below options:
TDS will be deducted at 10% on dividends received above INR 5000.
Tax of 10% on dividend income in excess of Rs. 10 lakh per year.
so which option is correct for current FY and option 2 is applicable to whom ?
@Laxmi_Navlani @Divya_Singhvi @AkashJhaveri @Kaushal_Soni can you?
Option 2 of 10 lakhs applicable to which category ?
Hey @Kuldeep_Singh,
From AY 2021-22 onwards, dividend received by shareholder will be taxed in the hands of shareholders and not on company. Dividend is not tax free income and hence if total dividend exceeding of Rs. 5000 is liable to deduct TDS u/s 194 at the rate of 10%.
Prior to AY 2021-22, tax on dividend was applicable to shareholders only when total amount exceeds 10 lakhs but now there’s no relevance of sec.115BBDA.
For more understanding, you can refer below article for taxation on dividend income:
Hope, it helps!
Hi, I have a dividend which is declared on 31-03-21, but it is not credited in my bank account on this date, it was just declared, now while filing ITR for FY-2021 , should I count this dividend for FY21 or since this dividend is credited after FY-21 to my bank account, I should include it next year.
kindly help me with this,
Hey @Sheirsh_Saxena, you will declare this income in the assessment year of the corresponding financial year in which you receive this dividend income. You can read more about it from here:
Hi, I hold units of an INVIT, particularly IRB invit fund, which quarterly payout an amount, but each quarter I have received an amount less than the mentioned per unit, since the TDS was being deducted on it, each quarter.
Is there any way I could receive the TDS amount back, and how,
I have recently received a form 16A from IRB invit fund ,which shows 3000 has been paid as TDS already.
Any suggestions, how does it work.
Hey @Sheirsh_Saxena,
You can claim the TDS deducted by filing your ITR.
Here’s an article, where you can learn more about Taxes on Dividends.
Hi @Clayton
You can refer to the following answer by Nithin Kamath.
If you need further clarification, feel free to reach out.
Will be happy to help.