DDT is the tax paid on the dividends earned. The company that pays out the dividend to the investor pays the DDT as well. So, the investor is exempted, while the enterprise is charged.
The dividend distribution tax in India is charged at a rate of 15% on the gross dividend amount. It goes up to 17.65% on the actual dividend. For example, let us assume that your dividend is Rs 2 lakh. The gross up dividend will be calculated at a rate of 17.65%. The amount, Rs 235300 will be added to the dividend of Rs 2 lakhs. Next, a flat rate of 15% will be charged to the gross dividend.
The DDT taxation follows the clauses of Section 115-O of the Indian Income Tax Act.
The tax needs to be paid within a fortnight of the dividend being announced or paid, whichever is earlier. If the enterprise fails to pay the amount on time, an interest rate of 1% will be charged for each day of the delay. Section 115P of the Indian Income Tax Act has this provision in place.
There are certain special clauses that apply to DDT. They are:
Yes, DDT applies to mutual funds as well.
Many investors aim to get regular income from the dividends of equity-oriented funds. Such investors should re-evaluate their financial plan. This is because the DDT levied on the dividend would eat into their earnings and lower the amount considerably. While the investor does not have to pay tax, the firm would deduct the taxable amount. At the same time, the investor would receive the lower sum. Unless he or she invests a large sum, the earnings will not be very profitable.
There are some important points that you should know about the DDT. They are:
1. DDT is separate – The DDT tax paid by a firm is different from the income tax it pays. The DDT is paid in addition to the income tax. The company is not entitled to any deduction or benefit because it pays the DDT. The DDT is a separate entity altogether.
**2. No DDT on New Pension System Trust (NPST) **– If the dividend payout happens for the NPST, then the dividend will not be taxed.
3. Section 115BBD – As per the clauses of Section 115BBD of the Indian Income Tax Act, there is a concession available on the DDT paid by an Indian company when it receives the dividend from its foreign subsidiary. The rate is fixed at 15% in such a case.
The total amount of dividend paid is wrapped at 85%. But it can rise up to 100%. This typically happens when 15% is levied on the gross sum. Here is an example for you to get a clearer idea:
Related: Penalties Under the Income Tax Act
While you do not directly pay out the dividend distribution tax, the money is still deducted from your share. The firm deducts the amount and then pays the remaining dividend to you. So, check to see if the calculations are proper and ensure you get the correct dividend for which you are entitled.
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