Dividend Distribution Tax

You keep hearing about people who have invested in a company, new or old, and how they are getting returns on their investments that amount to some impressive numbers. Or you will hear about how companies have announced dividends and the investors in that company walking away with large sums of money. As is the case with all income, including the income from these investments, all the dividends announced are liable for tax. This tax is known as the dividend distribution tax or DDT and applies to those payments that are made by companies to investors in the form of dividends. Let’s explore this topic a little more.

What is Dividend Distribution Tax?

When a company announces dividends, it is liable to pay a tax on the amount that is paid as a dividend. This tax is referred to as the dividend distribution tax and is payable by the company announcing the dividends.

Investors can receive dividends from two types of companies, foreign and domestic. The tax situation for each of these is:
Domestic Companies: Investors won’t have to pay any tax on the income they earn from dividends announced by domestic companies that they may have invested in.
Foreign Companies: If the investor has invested in a foreign company, then the dividends paid by the company will be taxable and the tax will have to be paid by the investors.

The dividend distribution tax is also applicable to mutual fund investments but since investments in domestic equities (Indian companies) are exempt from this tax, it is applicable to investments in the money/debt markets.

Note: What are Dividends?
As stated earlier, a dividend is a return that a company gives to its investors. It is announced every year and is generally paid from the profits that a company may have made in that year. The profit that is made is split into parts, with each investor getting a certain percentage of the profit. These percentages can be referred to as dividends. These dividends are generally of two types, preferred dividends, and variable dividends. The difference between the two is that preferred dividends offer a fixed rate of return and while variable dividends are determined by the profits that the company makes in the year.

Who is required to pay Dividend Distribution tax?

Dividend distribution tax has to be paid by companies on the dividend amount that is generated by them. Domestic companies are exempt from this but is applicable to foreign companies. Money or debt market instruments are liable for this tax.

When is DDT to be paid?

In general, DDT is paid within 14 days from the date of declaration, distribution, or payment of dividend, whichever is sooner. Under the provisions of Section 115P of the Income Tax Act, the companies will be liable to pay interest at the rate of 1% from the date following the date of declaration of the DDT.

Dividend Distribution Tax Rates

While there is no tax on dividends when it comes to investors, there is a tax that the company will have to pay and it is paid at the rate of 15%. This rate will also apply to dividends that are distributed by a domestic company from the profits earned by its subsidiary that happens to be a foreign company.

Calculation of Dividend Distribution Tax

There are certain rules that are followed when assessing dividend distribution tax and they are mentioned in section 115-O of the IT Act. These rules are:

  • The profits made by domestic subsidiaries of a company won’t be included in the profit while computing the dividend distribution tax.
  • If the subsidiary is a foreign company then a tax will be paid by the parent company on the income for the subsidiary.
  • Dividends once taxed, cannot be taxed a second time.
  • The DDT has to be paid to the government within 14 days of the declaration, distribution or payment of dividends.
  • The responsibility for paying the tax lies with the company and the principal officer.

Special Provisions related to Dividend Distribution Tax

There are 3 special provisions in relation to DDT. These are listed below:

  • Section 115-O: Tax on distributed profits of domestic companies.
  • Section 115P: Interest payable for the non-payment of tax by domestic companies.
  • Section 115Q: When the company is deemed to be in default.

Dividend Distribution Tax on Mutual Funds

DDT is applicable to mutual funds and the details of the same can be summed up as follows:

  • The rate applicable to debt-oriented funds is 25%, which goes up to 29.12% when cess and surcharge is included.
  • The dividend which is received by the investors is exempt in the hands of the fund-holder.
  • The rate applicable to equity-oriented funds is 10%, which goes up to 11.648% when cess and surcharge is included.

Other important factors about Dividend Distribution Tax

The other important factors which are to be noted in relation to Dividend Distribution Tax or DDT can be summed up as follows:

  • DDT is paid in addition to the usual income tax liability of a company. Deductions or credits are not allowed for the DDT paid by the company.
  • Under Section 115BBD, the Indian companies which receive dividend from its foreign subsidiaries are eligible for a concessional tax rate of 15% on the dividend.
  • DDT is not payable in the case of dividends paid to a person or dividends paid on behalf of the New Pension System Trust.
  • Under the provisions of the Act, deductions in regard to expenses, allowances, or set off of loss are not allowed to the taxpayers while computing the income from dividends.

FAQs on Dividend Distribution Tax

1. what is DDT in tax stands for?

DDT stands for Dividend Distribution Tax.

2. Who is responsible for dividend distribution tax?

A company that has declared, distributed, or paid any amount as a dividend is responsible to pay a dividend distribution tax.

3. what is the dividend distribution tax rate for domestic companies?

Domestic companies need to pay 15% of the gross amount of dividend as DDT.

News About Dividend Distribution Tax

  • The government might halve tax on dividend income for huge investors

    The central government might halve the tax on dividend income for those in the highest tax bracket. Now, the government is looking to amend the regulations and also cut the tax dividends to 20% from 43% for all Indian investors. Post the budget, dividend income was taxable till 43%.

    All foreign companies are set to pay 5% to 15% tax on their dividends, and this is based on the tax treaty that India has with the other country. The Indian government has also spoken to some prominent mutual fund advisors, senior revenue officials, tax advisors, and also a few lawyers and are now taking their suggestions into consideration.

    Girish Vanvari, founder, tax advisory Transaction Square had said that there is now a difference of 22% between tax on dividends payable by an Indian promoter and tax on dividends paid by a foreign company. He had also added that this led to many domestic companies hurrying to pay out their dividends before April. In light of this, he had stressed that establishing parity between tax on dividend paid by an Indian company and that paid by a foreign company will ease the process of doing business.

    11 March 2020

  • Government may reduce the dividend income tax rate for big local investors by half

    The government is looking into reducing the tax rate on dividend income by half for people who come under the highest tax bracket. The move will improve stocks that are falling globally.

    In the case of individual investors in India, the government may make small changes to the current regulations to bring down the tax dividends from 43% to 20%. The concession may be provided by the government by reducing the tax on dividend income to a flat 20%. For foreign companies, tax payments ranging between 5% and 15% on the dividends will have to be made. The amount that must be paid will depend on the tax treaty that the country has with India. The government has requested suggestions from lawyers, tax advisors, prominent mutual funds, and senior revenue officials. Requests have been made to the government to change the anomaly that favours foreign investors by prominent investors and several investor associations. The Dividend Distribution Tax (DDT) was removed by the government and it was made taxable at the hands of investors. Earlier, the DDT was 20%, which was the pure cost since it was in the hands of the company.

    05 March 2020

  • Dividend Tax on InvITs may not be stopped

    The proposal of levying Dividend Distribution Tax on Infrastructure Investment Trusts (InvITs) as well as real estate investment trusts (REITs) will be carried through by the government as it believes that it is in alignment with an exemption-free regime and will not be detrimental to the interests of foreign and retail investors. InVITs and REITS are seen to be tools that raise capital which new projects can utilise to reduce asset load as well as providing a viable exit option for investors who wish to exit from a project. The dividend income will be taxed according to the income bracket. Overseas investors can avail a tax credit for the taxes that they pay in India.

    03 March 2020

  • Dividend tax law leaves investors in a pool of confusion

    The law seems to have left a lot of grey areas when it comes to dividend tax. Companies are left confused as to how the tax will play out when they declare dividends before 31 March 2020, but the shareholders receive the money only after 1 April 2020.

    The amendments of the Union budget mentions that the dividend distribution tax (DDT) is not payable by mutual funds and companies (section 115-R/115-O) in respect of any dividends or income that has been “declared, distributed or paid” after 31 March 2020. The earlier exemption under section 10(34) and 10(35) of the Income Tax Act that was given to investors has now been removed with effect from 1 April 2020.

    19 Feb 2010

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