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Dividend Distribution Tax - DDT

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Sakshi Shah

Budget 2020
DDT
Dividend Income
Last updated on May 19th, 2021

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.

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, TDS under Section 194 and Section 194K was introduced 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 115O. Since the DDT is calculated on Gross Dividend, the effective rate comes to 17.65%.

TDS on Dividend paid in FY 2020-21
Refer to this blog to know more about TDS under Section 194 & Section 194K
View Blog
TDS on Dividend paid in FY 2020-21
Refer to this blog to know more about TDS under Section 194 & Section 194K
View Blog

Example

A Domestic Company declares a dividend of INR 5,00,000 on 10th April 2019. Calculate DDT that Company should pay.

  1. Calculate Gross Dividend

    Gross Dividend (100%) = Net Dividend (85%) + DDT (15%)
    Gross Dividend = INR 5,00,000 * 100/85 = INR 5,88,235.29

  2. 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%.

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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 dividendSection 194K (TDS on Dividend from Equity Mutual Funds) and amended the existing Section 194 (TDS on Dividend from Equity Shares).

FAQs

What is the tax treatment of dividend income from Foreign Company?

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.

Why was the Dividend Distribution Tax (DDT) abolished under Budget 2020?

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.

Got Questions? Ask Away!

  1. 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.

    • Sec 194 - A Company should deduct TDS at 10% on dividend paid on equity shares if the dividend amount exceeds INR 5,000. For FY 2019-20, this rate is reduced to 7.5%
    • Sec 194K - An AMC should deduct TDS at 10% on dividend paid on equity mutual funds if the dividend amount exceeds INR 5,000. For FY 2019-20, this rate is reduced to 7.5%

    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.

  2. 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:

    1. TDS will be deducted at 10% on dividends received above INR 5000.

    2. 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 ?

  3. Option 2 of 10 lakhs applicable to which category ?

  4. 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!

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