If a company is making profit then they provide it to the company’s shareholders which is known as dividend. Dividend is income for shareholders that’s why it is taxable in the hands of tax payer.
Though, Income tax act 1961 provides exemption of dividend which is receive from an Indian company by inflicting a tax which is called as dividend distribution tax which will be on the company who is paying the dividend. The provisions regarding dividend distribution tax is governed by Section 115O.
Who Is Required To Pay Dividend Distribution Tax?
Domestic company who is either declaring the dividend or distributing the dividend is required to pay DDT @ 15% which will be on the gross amount of dividend, it is described under Section 115O. Thus, the effective rate of dividend distribution tax will be 17.65% on the amount of dividend.
Dividend Distribution Tax under Section 115O is 15% but if there is a case of dividend which is referred in Sec. 2(22) (e) of the act then it will be risen from 15% to 30%.
The DDT stands withdrawn with effect from 1st April 2020.
What is the Period for When DDT Is to Be Paid?
Dividend Distribution Tax will be paid within 14 days of either dividend declaring or dividend distributing or payment of dividend made whichever is earlier. If the company is not paying the tax within 14 days then they will be liable to pay interest @ 1% of DDT. The interest will be liable to pay by the company from when the dividend distribution tax was actually payable till the time when company pays the dividend distribution tax to the government. This provisions are described under Section 115P.
Special Provisions:
1. If a HUF i.e. Hindu Undivided Family, individual or Partnership Firm and Private Trust are receiving income which is in a dividend way and it is exceeding INR 10 Lacs then it will be chargeable @ 10%.
2. If a holding company is getting dividend from their subsidiary company, then whenever the holding company will distribute dividend the amount for which dividend liable for DDT will be equal to:
(Dividend declared or distributed or paid during the year) – (Dividend received by holding company during the year).
DDT on Mutual Funds:
Mutual funds are liable for DDT too:
- If the funds is debt oriented in that case the dividend distribution tax will be @25% plus surcharge and CESS which will result into 29.12%.
- Previously if the funds are equity oriented then they’re exempted from dividend distribution tax. But it was introduced in budget 2018 that even equity oriented funds will also be liable for dividend distribution tax @ 10% plus surcharge and CESS which will result into 11.648%.
- Dividend which is received by investor is totally exempted for the person who is holding the funds.
What are the Impact of DDT on the Investor?
Mutual fund which invests less than 65% of whole in the equity those funds are known as non-equity funds which are like debt funds for only taxation purposes. Investors who are looking for periodic income or regular income from dividends of funds which are equity oriented requires to reconsider their strategy, and that is because of taxes which are on returns will be reduced than in hand return. Alhough, the dividends are tax free for the investors. The house of fund will reduce the dividend distribution tax before any payment made to dividend.
Note
According to the Budget 2020, the finance minister has abolished Dividend Distribution Tax (DDT). Now the incidence of dividend income taxation is shifted to investors from the companies.