Dividend Distribution Tax (DDT): Meaning, Applicability, Provisions

Find out what DDT is, how it is calculated, and who is applicable to pay it.

When you buy shares of a company via the stock market, there are two main ways by which you can make money. The first is by the usual technique of buying stocks when the market is low and selling when the market is high, thus making a profit. The other, more long-term way is through dividends. Since you essentially own a tiny part of the company via the stocks that you purchased, the company will pay you your share of the earnings if it makes a profit. This is called as a dividend, and every company pays dividends to all its shareholders when it makes a profit.

Getting Started with Dividend Distribution Tax

According to section 115-O of the Income Tax Act, every company is liable to pay a tax on their dividends at the time of distribution. This leads us to DDT, or Dividend Distribution Tax. Read on to find out what exactly DDT is and how it is calculated.

What is Dividend Distribution Tax?

Typically, all individuals including shareholders of a company are required to pay income tax based on all their income sources. Since shareholders receive dividends from the company on their investment, even this dividend is applicable to be taxed. However, instead of taxing the dividend at the shareholder’s end, the Income Tax Act states that the dividend should be taxed at the company’s end when they’re distributing the dividend to their shareholders. And this tax that a company deducts from its gross dividend at the time of dividend distribution is called the Dividend Distribution Tax or DDT. The DDT is a tax levied over and above the income tax the company is liable to pay and is separate.

Who is applicable to pay Dividend Distribution Tax?

In accordance with section 115-O of the Income Tax Act, any domestic firm that declares and distributes dividends is liable to pay the Dividend Distribution Tax. The company is required to pay the DDT within 14 days of declaration, distribution or payment of the dividend, whichever is earliest. If the company fails to pay the dividend tax in the stipulated time, then they’re charged with an interest of 1% every month until the DDT is paid to the government.

What is the Dividend Distribution Tax rate?

The DDT is currently set at 15% of the gross dividend of a company per annum. To calculate gross dividend from the actual dividend, the 15% tax is added to the dividend initially and then the actual DDT is calculated at this new gross dividend amount. The effective rate of DDT then comes to 17.65%.

For example, if a company is paying a dividend of Rs. 100,000/-

The gross dividend after adding 17.65% tax would be = Rs. 1,17,650/-
Now that we have the gross dividend, DDT is calculated at the rate of 15% of the gross dividend amount, which comes down to Rs. 17647.5/-

Thus, a dividend of Rs. 100,000 would require a DDT of Rs. 17,650/-

Is there Dividend Distribution Tax on mutual funds?

To answer the question, yes, even mutual funds have Dividend Distribution Tax. The DDT for debt funds is set at 25% excluding surcharge and Cess. Equity oriented mutual funds, which were previously exempt from DST are now charged at 10% DDT excluding surcharge and Cess.

Special Provisions of Dividend Distribution Tax

Dividend tax is exempt in the hands of the investor since it is applicable to the company itself, but this is only true for dividends up to Rs. 10,00,000/-. Over and above this amount, the investor is required to pay tax at the rate of 10%

Since DDT is applicable to domestic companies, investors receiving dividends from such companies are not liable to pay tax on it. However, when it comes to foreign companies, the onus of tax falls on the shareholder and they have to pay income tax on the dividend according to the tax slab that they’re categorized in.

Other key points of Dividend Distribution Tax

- Dividend Distribution Tax is a separate entity from income tax that a company is liable to pay. Companies have to pay DDT in addition to paying their usual Income Tax.

- Where sections like 80C allow for deductions of income tax, no such provision exists for Dividend Distribution Tax. It cannot be deducted in any case.

- DDT is not payable if the dividend is paid on behalf of New Pension System Trust.

- If an Indian company has a foreign subsidiary that pays dividends to it, then this dividend is taxed at a concessional DDT rate of 15%

- In calculating the dividend of a company, there is no provision to allow for deductions due to loss, expenditure or allowance.