Dividend Distribution Tax

By : Neha Dhyani

Updated : Mar 11, 2022, 13:43

A dividend is the company's profits earned and given to its shareholders. Ideally, making dividends a form of taxable income in the hands of the shareholders. This type of tax that is levied on the profits distributed by the firm is called dividend distribution tax. According to the provisions made in the income tax act, the tax is levied before the company distributes the dividends.

The DDT is taxable at the source and levied at the hands of the shareholder and firm. One exception of dividend distribution tax is that shareholders who earn more than 10 lakh profits are subjected to pay additional tax on the income.

Who pays the Dividend Distribution Tax?

An Indian company distributing dividends becomes automatically eligible to pay dividend distribution tax. The rate of DDT is 15% on the gross amount of dividend as mentioned under Section 1150. Thus, an effective dividend distribution tax rate is 17.65% on the total value of the dividend. Please note that in Section 2 (22) (e) of the income tax act, the rate of tax on the dividend can be increased from 15% to 30%.

When should you pay Dividend Distribution Tax?

Dividend distribution tax must be paid within the first 14 days of distribution or declaration of the dividend. It is safer to pay the tax as soon as possible as in case of failure of tax payment within the deadline could lead to severe repercussions. For instance, the company will be liable to pay a 1% interest rate of the DDT after 14 days until the government's tax payment is successfully made.

Characteristics of Dividend Distribution Tax

  • The dividend distribution tax is payable separately, which means it is considered a part of an organization's income tax liability.
  • There are no credit or DDT deductions made for any company.
  • The concessional rate of DDT, as per the Section 115BBD, is 15%
  • No allowances, reduction in expenses, or losses will be considered while calculating the DDT of the taxpayer.

Special Provisions

  • Companies are exempted from paying DDT on or after 1-2-20
  • The DDT is now levied in the hands of shareholders.
  • According to Section 194, the company will deduct tax at 10% if the dividend value crosses Rs. 5,000
  • Provisions made under Section 115BBD are no longer applicable.
  • Exemption made under Section 10 (34) is withdrawn for the year 2021-2022

It is the responsibility of every shareholder receiving a dividend above the set maximum limit to pay dividend distribution tax. Follow the guidelines and ensure to be updated on the recent financial news to learn more about DDT.

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FAQs on Dividend Distribution Tax

Q.1. Why do companies not have to pay Dividend Distribution Tax?

During Budget 2020, the Indian Finance Minister abolished the Dividend Distribution Tax. The burden is tax is shifted from the companies to the shareholders.

Q.2. Is Dividend Distribution Tax applicable on mutual funds?

Yes, mutual funds are also subjected to Dividend Distribution Tax. On debt-oriented funds, the rate of dividend distribution tax is 25%.

Q.3. Are equity-oriented funds subjected to Dividend Distribution Tax?

Dividend Distribution Tax is m applicable to equity-oriented funds after the introduction of Budget 2018. The rate of DDT is currently at 10%, with a 4% cess and 12% surcharge.

Q.4. What is the exemption limit for Dividend Distribution Tax?

Shareholders are exempted from paying Dividend Distribution Tax if their dividends distributed by the domestic company are not over 10 Lakhs. After which, a 10% rate will be charged to the shareholder.