Dividend Distribution Tax

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What is a Dividend Distribution Tax on dividend income?

The dividend is the money earned by an investor, whether a person or a HUF, for buying stock in a firm. Placed, it is the transfer of a company’s profits to its owners.

While the dividend paid or reported by a domestic corporation is levied in compliance with section 115-O of the Income Tax Act, an extra 15% of the tax is payable. This is regarded as a dividend levy on companies. The tax is paid at a rate of 30% in the case of a deemed dividend under section 2(22)(e).

Dividend Distribution Tax is charged at 10 per cent when the gross dividend income is over 10 Lakh, along with a 4 per cent cessation of health and education under section 115BBDA.

Dividend Distribution Tax CalculationDividend Distribution Tax

The Dividend Distribution Tax received from domestic companies is deducted at the rate of 15%. The tax is deducted and paid by the company, so the dividend received in the shareholder’s hands is fully exempt.

Thus, if the company declares ₹ 5 Lakh as a dividend, then the dividend distribution tax would be 15% of ₹ 5 Lakh, which is ₹ 75,000.

Therefore, the investor would receive ₹ 4.25 Lakh. Thus, the effective rate of dividend distribution tax from the shareholder’s point of view is (75,000/4.25 lakhs)*100 = 17.647%.

So, depending on the value earned by the shareholder, you can measure dividend payout tax as follows: 4.25 lakhs*17.647 per cent = 75,000

Who is required to pay the Dividend Distribution Tax (DDT), and at what rate?

The corporation must collect the Income Payment Tax before the dividend is either paid or distributed. Since deducting the levy, the dividend earned from owners makes the balance in their hands tax-free.

The rate at which dividend allocation tax is imposed on domestic corporations’ reported dividends is 15 per cent. If a shareholder earns more than ten lakh of dividend revenue, he is entitled to a 10% tax rate and a 4% health and education cess.

When is Dividend Distribution Tax to be paid?

The DDT or Dividend Distribution Tax shall be collected within 14 days of the dividend being decelerated, paid or distributed, whichever is sooner. Failure to pay the tax within 14 days would result in interest of 1% of the payable tax starting on the following day of the 14th day. The interest will be assessed by the time that the tax is finally billed to the government.

Special Provisions relating to Dividend Distribution Tax

Two special conditions refer to Dividend Distribution Tax:

a) Individuals, HUFs, alliance companies, and private trusts that earn dividend profits above ten lakh rupees are taxed at a rate of ten per cent.

b) When the holding company pays a dividend, the amount of dividend income that is entitled to DDT if the holding company still earns a dividend from the subsidiary company and all firms are domestic is equal to:

  • Declared/paid/distributed dividend profits
  • Less: the dividend earned from the corporation of the subsidiary

Dividend Distribution Tax on Mutual Funds

For mutual funds, the applicability of Dividend Distribution Tax is as follows:

  • The equity-oriented funds are subject to a 10% tax rate. After adding the surcharge and cess, the premium rises to 11.648 per cent.
  • The dividend which the fundholder or creditor earns is excluded.
  • DDT is applicable at the rate of 25 per cent in the case of debt-oriented funds. After adding surcharges and cessation, this premium rises to 29.12 per cent.

Dividend Distribution Tax Income received from a Domestic Company

According to section 10(34) of the Income Tax Act, any income earned as a dividend from an Indian corporation by a person or HUF is tax-free since the company declaring the dividend has already deducted dividend distribution. Section 115BBDA (as enacted in the Finance Act, 2016) is liable to pay tax at the rate of 10 per cent on dividend tax before paying the dividend if the gross dividend earned by an individual/HUF from corporations reaches 10,00,000.

Underland revenue, on the other hand, was more than ten lakh rupees. Section 115BBDA applies only to dividend revenue earned under Section 10(34) from domestic firms and includes dividend revenue received under Section 10(34) from mutual funds (35).

Illustration 1: Tax at the rate of 10% on dividend income received by an Indian company under section 15BBDA

During the fiscal year 2017-18, Mr Mehta received ₹15,00,000 in dividends from various Indian firms. Since his dividend income for the year reaches ten lakh rupees, he must pay a tax of ten per cent on any surplus dividend income generated above ten lakh rupees. In this situation, he is responsible for paying a 10 per cent tax on 5 Lakh (dividend gain above ₹10 Lakh), which converts into an ₹50,000 tax liability.

Dividend Distribution Tax Income received from a Foreign Company

Under Section 115BBD of the Income Tax Act, under the heading “Income from other sources,” the dividend earned by an individual/HUF from a foreign corporation is entirely taxable. The dividend received is counted in the beneficiary taxpayer’s total income and taxed according to the taxpayer’s income tax rate slabs.

Dividend income received from debt and equity mutual funds

Any income earned by an individual/HUF as a dividend from a debt mutual fund scheme or an equity mutual fund scheme is entirely excluded from tax under section 10(35) of the Income Tax Act. Dividends announced by domestic firms are subject to an Income Payment Tax in addition to the tax charged by owners (DDT). The DDT varies depending on the form of organisation that declares the dividend.

Type Of Entity Declaring Dividend Dividend Distribution Tax Rate For Individuals/HUFs Relevant Section Of Income Tax Act
Domestic companies 17.304% (including 12% surcharge and 3% education cess) Section 115-O
Equity mutual funds 10% Section 115-R
Debt mutual funds (including liquid mutual funds) At the rate of 28.84% (including surcharge and cess) Section 115-R
Foreign companies Nil  

Dividend Distribution Tax to be paid by the company

Dividend Distribution Tax by a domestic company

Domestic firms declaring dividends are liable to pay dividend payment tax before crediting the dividend on their shareholders’ accounts, in compliance with section 115-O. The tax rate on the payment of dividends varies according to the form of the company declaring the dividend. The dividend payment tax of 15 per cent plus a 12 per cent surcharge and 3 per cent education cess, translated into an effective tax rate of 17.304 per cent, must be charged by a domestic corporation.

Illustration 2: A firm declared a 200-dollar dividend to its owners. A dividend payout tax of 17.304 per cent is owed from the corporation, resulting in a tax obligation of $35. Before the dividend is added to its owners’ account, the corporation will have to subtract this fee, which will amount to ₹ 165.

Dividend Distribution Tax distributed by a Foreign Company

Dividend transfer tax is not payable by a multinational corporation on dividends paid to its owners.

Dividend Distribution Tax by debt mutual funds

Individuals and HUF holders are subject to a dividend payment tax of 28.33 per cent (including surcharge and cess) on distributions or interest distributed on debt mutual funds. Before the mutual fund credits dividends to debit mutual fund investors, DDT is excluded from the distribution.

Dividend Distribution Tax by equity mutual funds

As per the 2018-19 budget, distributions or gains distributed on equity mutual funds are charged at 10 per cent.

FAQs for Dividend Distribution Tax

What is the Dividend Distribution Tax rate for 2019?

The dividend tax rate for 2019 on income received by way of dividends from a domestic company is 15%.

Is there a tax on dividends in India?

The tax on dividends in India is deducted and paid by the company. The investor or shareholder received the dividend minus the tax amount; thus, it is tax-free income in the investor’s hands, subject to certain conditions.

How do I avoid paying taxes on dividends? Dividend Distribution Tax

As a shareholder or investor, you have to pay tax on dividends only when your income by way of the dividend exceeds ₹ 1 Lakh. If your dividend income is less than ₹ 10 Lakh in a financial year, you won’t have to pay dividend tax. Visit Dialabank’s official page for further information.

Are dividends taxed?

Yes, the dividend is taxed at different rates depending upon whether the company is domestic or foreign and whether the amount received by the shareholder in a financial year by way of the dividend exceeds ₹ 10 Lakh or not.

Are dividends tax-free?

If the dividend amount received in a financial year does not exceed ₹ 10 Lakh, it is tax-free income in the hands of the shareholder/investor.