• HDFC securities
• 10 Mar 2023
• Knowledge Centre

 

 

Equity investments are often considered to be one of the best forms of long-term investments. Apart from generating returns and creating wealth, another great benefit of equity investments is the ability to earn dividends. Dividends are a share of the company’s profit that is given to the investors. Although receiving dividends is something many investors look forward to, it is critical to understand the tax associated with it - the Dividend Distribution Tax (DDT)

What is the Dividend Distribution Tax?

For investors as well as businesses, it is critical for one to know the meaning of dividend distribution tax. According to the Income Tax Act, a company distributing a dividend has to pay a tax on the total dividend amount. This is known as the dividend distribution tax or DDT.

DDT is taxable at the hands of the company. Hence, it is deducted at the time of distributing dividends by the company. Therefore, the shareholders receiving dividend payments do not have to pay the DDT.

Under Section 115 O of the Income Tax Act, a domestic company distributing dividends has to pay the DDT at the rate of 15% of the grossed amount of the dividend. The effective rate of the DDT comes at 17.65% (exclusive of surcharge and cess). If the percentages of surcharge and cess are included, the effective rate would be 20.56%. However, in the case of the dividend referred to in Section 2 (22) (e), the DDT has been increased from 15% to 30%.

We can understand DDT better with the help of an example:

If company ABC has declared a dividend of Rs 5,00,000 then, the grossed-up dividend would be calculated at 17.65% of the dividend amount. This would result in a grossed-up dividend of Rs 5,88,250.

Next, the DDT of 15% is calculated on the grossed-up dividend. This will result in a total DDT of Rs 88,238.

It is to be noted that the DDT excludes any additional surcharge or cess.

The company has to pay the DDT to the government within 14 days of the declaration, distribution, or payment of the dividend; whichever is earliest. Failing to do so, an interest rate of 1% per month or part thereof gets accumulated until the amount is paid.

Provisions on DDT

There are certain provisions related to DDT tax

• If dividend income exceeds Rs 10 lakh then the income would be subject to tax at the rate of 10% for individuals, partnership firms, private trusts and Hindu undivided families (HUF).
• If a parent company receives dividend from a subsidiary and if the parent company is declaring a dividend too, then the DDT will be calculated on the difference between the dividend paid and the dividend received during a particular year.

Mutual funds and DDT

It is important for one to know that DDT is applicable to mutual funds as well.

• Debt-oriented mutual funds are subject to 25% DDT. This rate is 29.12% including surcharges and cess.
• DDT on Equity mutual funds is 10%. This tax amount totals up to 11.64% after including surcharges and cess.

Like any other tax, learning and understanding about DDT is vital when planning your financial and investment goals.