What Is Dividend Distribution Tax (DDT)?

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  • 06 Feb 2023

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.

When Is The Tax Paid?

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.

Related: Common mistakes made when filing income tax returns

There are certain special clauses that apply to DDT. They are:

  • If you earn a dividend of more than Rs 10 lakhs, extra tax will be charged on the amount. A dividend distribution tax rate of 10% would apply. This rule applies to individuals, Hindu Undivided Families (HUFs), private trusts, and partnership firms.
  • Suppose a domestic holding company receives dividend from its domestic subsidiary firm. When the holding company distributes dividend, the dividend amount subject to DDT will be as per the following calculation:
  • The dividend paid/declared/distributed during the year minus the dividend received by the holding company during the same year This calculation is subject to certain conditions.

Related: How to claim Tax Benefits under Section 54F

Does DDT Apply To Mutual Funds?

Yes, DDT applies to mutual funds as well.

  • If you have a debt-oriented fund, the DDT would be levied at a rate of 25%. This can go up to 29.1% after the inclusion of cess and surcharge.
  • If you have an equity oriented mutual fund, the DDT on mutual funds would be levied at a rate of 10%. This can go up to 11.6% after the inclusion of cess and surcharge.
  • The fund holder does not have to pay tax on the dividends earned by the investor.

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.

Related: Benefits of ELSS (Equity-linked saving schemes)

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:

  • Dividend paid is Rs 100
  • The gross dividend here would be [100/85*100] = Rs 117.65
  • The DDT would apply at a rate of 15% on Rs 117.65. This would amount to Rs 17.65
  • A 10% surcharge would be added to get Rs 1.76
  • Then, an education cess of 3% would also be added Rs 0.58
  • So, you would have a total rate of 19.99% on the dividend of Rs 100 There are some layers involved in the calculation and you must be aware of these figures to know how the DDT is levied.

Related: Penalties Under the Income Tax Act

The Final Word

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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