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.
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 a 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 and is applicable to those payments that are made by companies to investors in the form of dividends. Let’s explore this topic a little more.What are Dividends?
As stated earlier, a dividend is actually a return that a company gives to its investors. It is announced every year and are 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.
What is Dividend Distribution Tax (DDT)?
When a company announces dividends, it is liable to pay a tax on the amount that is paid as 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.
Dividend Distribution Tax Rate:
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 domestic company from the profits earned by its subsidiary that happens to be a foreign company.
This tax, when it comes to mutual funds, is paid by the scheme and, as usual, is not applied to investments in domestic equities. However the tax on investments in debt/money markets is as follows:
- If the investment has been made by an individual then the tax payable by the scheme is 28.84%.
- For companies that have invested in mutual funds, the scheme will pay a DDT at the rate of 34.608%.
- In the case of an NRI who has invested in debt instruments, the DDT chargeable will be the same as that for an individual.
All these tax rates include a surcharge of 12% and the cess of 3%.
How is Dividend Distribution Tax Calculated?
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.