INDEX
- What is Dividend Distribution Tax (DDT)
- Who Has to Pay Dividend Distribution Tax (DDT), and What is the Rate?
- Amendment under the Finance Act 2020 – Abolition of DDT for Indian Companies
- When is DDT Applicable?
- Special Provisions for Dividend Distribution Tax
- Dividend Distribution Tax (DDT) in Mutual Funds
- DDT on Private Companies
- Considerations for DDT Tax
Dividend Distribution Tax (DDT)
What is Dividend Distribution Tax?
Dividend Distribution Tax (DDT) is a tax imposed on companies that distribute dividends to their shareholders. The company is required to pay the tax to the government before distributing the dividend. This ensures the government receives a portion of the company’s profits.
Both Indian and foreign companies operating in India must comply with DDT regulations. However, the rate may differ depending on the tax treaty between India and the foreign company’s home country.
The DDT is charged on the earnings or dividends that the company distributes. Previously, companies paying dividends were required to pay DDT to the government at a rate of 15% on the gross dividend amount, under Section 115-O of the Income Tax Act. Additionally, under Section 2(22)(e), a tax of 30% was applicable on presumed profits, with shareholders exempt from paying tax on the dividend.
Who Has to Pay Dividend Distribution Tax (DDT), and What is the Rate?
DDT is a tax charged on dividends before they are distributed to shareholders. Previously, companies paying dividends in India were required to pay DDT.
The DDT used to require companies to pay 15% tax on the total dividend amount under Section 115-O of the Income Tax Act. Additionally, under Section 2(22)(e), tax on presumed profits was set at 30%, and the shareholder was not required to pay tax on the dividend.
Amendment under the Finance Act 2020 – Abolition of DDT for Indian Companies
In the Finance Act 2020, the government abolished the Dividend Distribution Tax (DDT) for Indian companies. As a result, Indian companies are no longer required to pay DDT on dividends paid to shareholders. Instead, the tax burden shifts to the shareholders, who will now pay tax on the dividends they receive based on their individual tax rates.
This change was introduced to reduce the burden on businesses and make India a more attractive place for investment. It also eliminates the issue of double taxation of profits, as the dividend income will now be taxed only at the shareholder level.
Under the new system, shareholders will be taxed based on their tax bracket. For instance, if a shareholder falls into the 30% tax bracket, the dividend they receive will be taxed at 30%.
When is DDT Applicable?
As per the Income Tax Act, DDT was required to be paid within 14 days from the earliest of the following events. If the tax was not paid by the due date, interest would be charged at 1% per month (or part thereof) on the unpaid amount. This interest will apply from the due date until the actual payment date.
Special Provisions for Dividend Distribution Tax
As per the provisions of the Income Tax Act, DDT must be paid within 14 days of the earliest due date. If not paid on time, an interest charge of 1% per month (or part thereof) will be levied on the unpaid tax. This interest will be calculated from the day after the last date for payment until the actual payment date.
Additionally, DDT is applicable in the following cases:
[The document may continue with specific scenarios for DDT application, which were not provided here.]
Dividend Distribution Tax (DDT) in Mutual Funds
Dividend Distribution Tax (DDT) is also applicable to mutual funds in India. The tax treatment varies depending on the type of mutual fund:
- Debt-Oriented Funds: These funds are subject to DDT at a rate of 25%.
- Equity-Oriented Funds: Initially, equity-oriented funds were exempt from DDT. However, in the 2018 Budget, a 10% tax was introduced on dividends distributed by equity-oriented mutual funds.
It is important to note that investors do not have to pay tax on the dividends they receive from mutual funds, as the tax is deducted at the source by the mutual fund itself.
DDT on Private Companies
According to Section 115-O of the Income Tax Act, any domestic company that declares or distributes a dividend must pay DDT at a rate of 15% on the gross amount of dividends.
The rate of DDT has been subject to periodic changes by successive governments, depending on market conditions. Therefore, the rates and computation methods for DDT have evolved over time.
Considerations for DDT Tax
With the abolition of DDT, the indirect tax burden that was previously passed on to shareholders is now directly paid by the shareholders themselves. This makes the tax calculation more straightforward. Some key points to consider:
- Taxation for Lower Tax Brackets: Shareholders in lower tax brackets can now add the full dividend amount to their income without having tax deducted at the source. This is beneficial for those in tax brackets below the taxable threshold, as dividends are not subject to tax for them.
- Tax Implications for Dividends Below Taxable Threshold: If the shareholder’s income is below the taxable threshold, the dividends received are not subject to income tax.
- DDT Separate from Corporate Income Tax: The DDT is treated separately from a company’s income tax obligation. The company cannot deduct or claim credit for the DDT paid on dividends.
- Tax Discount on Foreign Dividends: Under Section 115BBD, a 15% tax discount is available on dividends received by an Indian company from its overseas affiliate.
- No DDT for New Pension System Trust: If a dividend is paid to an entity on behalf of or in the name of the New Pension System Trust, DDT is not applicable.
- Limitations on Deductions: The taxpayer cannot deduct any expenses from dividend income, nor can they claim any allowances or set off losses against the dividend income under the Act.
Summary of Key Changes:
- Mutual Funds: DDT applies differently to debt and equity mutual funds. Debt funds are taxed at 25%, while equity funds were initially exempt but now attract a 10% tax since the 2018 Budget.
- Private Companies: Domestic companies declaring or distributing dividends must pay 15% DDT on the gross dividend amount.
- Abolition of DDT: The DDT has been eliminated, shifting the responsibility to shareholders. Shareholders can add the dividend directly to their income and pay tax according to their tax bracket.
- No Tax for Low-Income Shareholders: Shareholders with income below the taxable threshold do not pay tax on dividends.
- Special Tax Provisions: Companies receiving dividends from foreign affiliates may get a 15% tax discount. DDT is not applicable to dividends paid to the New Pension System Trust.
- No Deductions on Dividend Income: Shareholders cannot claim deductions, allowances, or set-off losses from dividend income.