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.