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Dividend Distribution Tax

Dividend Tax 2020

Last Updated 01st Oct 2020

Scenario Dividend Distribution Tax
Dividend received from domestic company 15% of the declared amount to be paid by the company
Dividend income received in excess of ₹ 1 Lakh by an individual/HUF/Partnership firm/private trust Additional 10% to be taxed in the hands of the receiver
DDT on Mutual Funds 10% in case of equity oriented funds and 25% in case of debt oriented funds
INCOME TAX CALCULATOR

What is Tax on Dividend Income?

The dividend is the amount received by an investor, whether it's an individual or HUF, on account of holding shares in a company. In simple words, it is the distribution of profits of the company to its shareholders.

While as per section 115-O of the Income Tax Act, the dividend paid or declared by a domestic company is charged an additional 15% of tax is to be paid. This is known as a corporate dividend tax. However, in case of deemed dividend under section 2(22)(e), the tax is charged at the rate of 30%.

Dividend income is taxed at the rate of 10% when the aggregate income received by way of dividend is over ₹ 10 Lakh, along with a 4% health and education cess under section 115BBDA.

Dividend Distribution Tax Calculation

The tax on dividends received from domestic companies is deducted at the rate of 15%. The tax is deducted and paid by the company, so the dividend received in the hands of the shareholder is fully exempt.

Thus, if the company declares ₹ 5 Lakh as dividend, then the dividend distribution tax would be 15% of ₹ 5 Lakh , which is ₹ 75,000.

Therefore, the investor would receive ₹ 4.25 Lakh. Thus, the effective rate of dividend distribution tax from the point of view of the shareholder is (75,000/4.25 lakhs)*100 = 17.647%.

So, you can even calculate dividend distribution tax based on the amount received by the shareholder, i.e., 4.25 lakhs*17.647% = ₹ 75,000.

Who is required to pay the Dividend Distribution tax (DDT), and at what rate?

Dividend Distribution Tax is required to be paid by the company before actually paying or distributing the dividend. The dividend that shareholders received is after deducting the tax, which makes the amount in their hands as tax-free.

The rate at which dividend distribution tax is levied on dividends declared by domestic companies is 15%. However, if the shareholder is receiving more than ₹ 10 Lakh as income by way of dividend, then he is liable to pay tax at the rate of 10% along with health and education cess of 4%.

When is DDT to be paid?

DDT or Dividend Distribution Tax is to be paid within 14 days of the deceleration, payment or distribution of the dividend, whichever is earlier. Failure to pay the tax within 14 days would attract interest at the rate of 1% of the payable tax from the next day of the 14th day. The interest would be charged until the time actual payment of the tax is not made to the government.

Special Provisions related to DDT

There are two special provisions related to DDT; these are:

a) The dividend income received by individuals, HUF, partnership firms, and private trusts in excess of ₹ 10 Lakh as income from dividend is taxable at the rate of 10%.

b) Next is, when the holding company declares a dividend, then amount dividend income liable for DDT in case the holding company has also received a dividend from the subsidiary company and both the companies are domestic, will be equal to:-

  • Dividend Income declared/paid/distributed
  • Less: Dividend received from the subsidiary company

DDT on Mutual Funds

The applicability of DDT on Mutual Funds is as follows:

a) The equity-oriented funds are taxable at the rate of 10%. Such rate increases to 11.648% after including surcharge and cess.

b) The dividend that is received by the fundholder or investor is exempt.

c) In the case of debt-oriented funds, DDT is applicable at the rate of 25%. Such rate increases to 29.12% after including surcharge and cess.

Dividend Tax Income received from a Domestic Company

As per section 10(34) of Income Tax Act, any income received by an individual/HUF as dividend from an Indian company is exempt from tax as the company declaring such dividend has already deducted dividend distribution Section 115BBDA (as introduced in the Finance Act, 2016), if aggregate dividend received by an individual/HUF from companies exceeds ₹ 10,00,000, it is liable to pay tax at the rate of 10% on dividend tax before paying the dividend.

However, underend income received in excess of ₹ 10 Lakh. Section 115BBDA applies only on dividend income received from domestic companies under Section 10(34) and excludes dividend income received from mutual funds under Section 10(35).

Illustration 1: Tax at the rate of 10% on dividend income received by Indian company under section 15BBDA

Mr. Mehta received ₹ 15,00,000 as dividend from various Indian companies during the FY17-18. Since, his dividend income for the year exceeds ₹ 10 Lakh; he is liable to pay tax at the rate of 10% on excess dividend income earned over ₹ 10 Lakh. In this case, he is liable to pay a tax of 10% on ₹ 5 Lakh (dividend income in excess of ₹ 10 Lakh), which translates into a tax liability of ₹ 50,000.

Dividend Tax Income received from a Foreign Company

As per Section 115BBD of Income Tax Act, dividend received by an individual/HUF from a foreign company is fully taxable under the head “Income from other sources”. The dividend received is included in the total income of the recipient taxpayer and will be charged according to the income tax rate slabs applicable to the taxpayer.

Dividend income received from debt and equity mutual funds

As per section 10(35) of Income Tax Act, any income received by an individual/HUF as dividend from a debt mutual fund scheme or an equity mutual fund scheme is fully exempt from tax. In addition to tax in the hand of investors, dividends declared by domestic companies also attract a Dividend Distribution Tax (DDT). DDT varies by the type of entity declaring the dividend.

Type of entity declaring dividend Dividend distribution tax rate for Individuals/HUFs Relevant section of Income Tax Act
Domestic companies 17.304% (including 12% surcharge and 3% education cess) Section 115-O
Equity mutual funds 10% Section 115-R
Debt mutual funds (including liquid mutual funds) At the rate of 28.84% (including surcharge and cess) Section 115-R
Foreign companies Nil

Dividend Distribution Tax to be paid by the company

Dividend distributed by a domestic company

As per section 115-O, domestic companies declaring dividends are liable to pay dividend distribution tax before crediting the dividend in the account of its shareholders. The rate of dividend distribution tax varies by type of entity declaring the dividend. A domestic company has to pay the dividend distribution tax of 15 % plus a 12% surcharge and 3% education cess which translates into an effective tax rate of 17.304%.

Illustration 2: A company declared a dividend of ₹ 200 to its shareholders. The company is liable to pay a dividend distribution tax of 17.304%, which translates into a tax liability of ₹ 35. The company will have to deduct this tax before crediting the dividend to the account of its shareholders which in this case will be an amount of ₹ 165.

Dividend Tax distributed by a Foreign Company

A foreign company is exempted from paying dividend distribution tax on dividend paid to its shareholders.

Dividend distributed by debt mutual funds

Dividend or income distributed on debt mutual funds is subject to a dividend distribution tax at the rate of 28.33% (including surcharge and cess) for Individuals and HUF investors. DDT is deducted from dividend before the mutual fund credits dividend in the account of debt mutual fund holders.

Dividend distributed by equity mutual funds

Dividend or income distributed on equity mutual funds is taxed at 10% as per the budget 2018-19.

Budget 2020 Tax Highlights

Main highlights from the budget presented by Hon’ble Finance Minister Ms. Nirmala Sitharaman on 1st Feb 2020.

  • Option to the taxpayer choose between old income tax rate and slabs and the new ones.
  • New tax slabs offer reduction in applicable tax rate from 20% to 10% and from 30% to 20% in some cases.
  • In case the tax payer opts for new slabs and rates, no exemption or deduction can be claimed such as those on account of house rent allowance (HRA) investments, LIC premium, school fees, mediclaim etc.
  • Dividend Distribution Tax has been withdrawn, and dividend income shall be taxable in the hands of the recipient.
  • The Insurance coverage of deposit in a bank has been increased from ₹ 1 Lakh to ₹ 5 Lakh.
  • The home loan interest exemption limit of ₹ 1.50 Lakh for home loans sanctioned on and before 31st March 2020 have been extended by 1 year to 31st March 2021.

FAQs

What is the dividend tax rate for 2019?

The dividend tax rate for 2019 on income received by way of dividends from a domestic company is 15%.

Is there tax on dividends in India?

The tax on dividends in India is deducted and paid by the company. The investor or shareholder received the dividend minus the tax amount; thus, it is tax-free in the hands of the investor subject to certain conditions.

How do I avoid paying taxes on dividends?

As a shareholder or investor, you have to pay tax on dividends only when your income by way of the dividend exceeds ₹ 1 Lakh. So, if your dividend income is less than ₹ 10 Lakh in a financial year, then you won’t have to pay tax on dividend.

Are dividends taxed?

Yes, the dividend is taxed at different rates depending upon whether the company is domestic or foreign and whether the amount received by the shareholder in a financial year by way of the dividend exceeds ₹ 10 Lakh or not.

Are dividends tax-free?

If the dividend amount received in a financial year does not exceed ₹ 10 Lakh, then it is tax-free in the hands of the shareholder/investor.


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