Dividend Distribution Tax: A Detailed Overview
A dividend is an amount that a business distributes to its shareholders from the profits it makes that specific year. In the hands of the shareholders, dividends represent income that ought to be taxable as income. Dividend Distribution Tax (DDT) was a tax levied on the firm that paid the dividend. Also, it allowed investors to deduct dividend income from their investments made in Indian companies under previous income tax regulations in India. Section 115O offered guidance on the provisions related to DDT. In this article, we will explain the concept of dividend distribution tax in detail.
Table of content
What is Dividend Distribution Tax?
Businesses that distribute dividends to their shareholders are subject to the Dividend Distribution Tax (DDT) imposed by the Indian government. However, the firm deducts the tax before giving the stockholders their dividends. This tax is intended to guarantee that the government receives an equitable portion of the business's earnings. All domestic and foreign companies doing business in India must also abide by the DDT. However, the tax rate can change.
The tax treaty between India and the home nation of the foreign corporation may affect the rate of tax. The corporation deducts the DDT tax from distributed earnings or dividends prior to distributing the money to shareholders. In India, companies had to pay the Dividend Distribution Tax (DDT) if they paid dividends to their shareholders.
Who is Liable to Pay Dividend Distribution Tax?
Section 115O stated that any domestic corporation that declared or distributed dividends pay DDT at the rate of 15% on the gross amount of the dividends. Consequently, the dividend amount was subject to an effective DDT rate of 17.65%. Companies were obligated by the now-abolished DDT to pay a 15% Dividend Distribution Tax. However, this tax was raised to 30% for dividends as mentioned in Section 2 (22)(e) of the Income Tax Act. In this instance, the shareholder was exempt from paying taxes on the dividend.
Rate of Dividend Distribution Tax
Any domestic business in India that declares or pays dividends is required to pay 15% of the payout's gross amount as dividend distribution tax (DDT). Section 115-O lays out these provisions. We will explain this calculation with the following example by determining the DDT for Rs. 2,00,000 declared dividends.
Step 1: Find the dividend that has been grossed up. This is added to Rs. 2,00,000 and computed at 17.65% on Rs. 2,00,000, totalling Rs. 2,35,300.
Step 2: Calculate the DDT by multiplying the grossed-up dividend by 15%, or Rs. 35,295. The DDT on Rs. 2,00,000 will therefore be Rs. 35,295.
There is no surcharge or cess at this rate. Incorporating the percentages of surcharge and cess would result in an effective DDT rate of 20.56%.
When is the Dividend Distribution Tax to be Paid?
Any domestic firm that declares or pays dividends is needed by the Income Tax Act to pay DDT within fourteen days of the earliest of the following scenarios:
The dividend announcement
The dividend distribution
The dividend payout
Interest of 1% per month, or the fraction thereof, shall be applied to the amount of tax due if the dividend is not paid within the allotted time. Interest will be assessed starting the day following the payment deadline and continuing until the government is actually paid.
Special Provisions Applicable to Dividend Distribution Tax
A 10% tax was applied to dividend income exceeding Rs. 10 lakhs for individuals, Hindu Undivided Families (HUF), partnership firms, and private trusts.
At the time of dividend distribution by the holding company, the amount of dividend liable for DDT was equal to the dividend received by the holding company from its subsidiary firm (both of which were domestic corporations).
Declaration, distribution, and payment of the annual dividend (less) Dividend received by the holding company for the year (conditions apply)
What is Corporate Dividend Tax?
The tax levied on the dividend sent to shareholders is known as the corporate dividend tax. It is given based on the declared or actual dividend for the year. To prevent double taxation, a dividend tax is excluded for shareholders of a corporation that is paying it. As per the Income Tax Act's Section 115-O, domestic companies that declare or distribute dividends are required to pay dividend distribution tax (DDT) at a rate of 15% on the total dividend amount. Dividend Distribution Tax has been imposed on a recurring basis by successive administrations in accordance with market conditions. Consequently, adjustments have also been made to the dividend distribution tax rates and computation procedure.
Dividend Distribution Tax on Mutual Funds
Mutual funds are likewise governed by DDT.
A 25% DDT rate is applied to debt-oriented funds.
DDT was absent from equity-oriented funds, nevertheless. In the 2018 budget, a 10% levy on mutual funds that prioritise equities was introduced.
Investor Dividends are free in fund holders' possession.
Impact on Investors
Mutual funds that allocate less than 65% of their corpus to equity are classified as non-equity funds, similar to debt funds for taxation purposes. Rethinking their approach is advised for investors hoping to get dividends from equity-oriented ETFs on a regular basis. Due to the taxation on returns, their in-hand return would be lowered. Nonetheless, the investor still receives the dividend tax-free. The DDT will be subtracted by the fund house prior to dividend disbursements.
New Provisions for Dividend Taxation: Abolition of DDT for Indian Companies under the Finance Act 2020
Under the terms of the Finance Act 2020, the Finance Minister eliminated and abolished the Dividend Distribution Tax (DDT) for Indian corporations. This change removes the requirement for Indian firms to pay DDT on dividends given to shareholders. Rather, dividends will be subject to taxation for shareholders according to their tax bracket. The goal of this initiative is to make doing business in India easier for companies while also lessening the load on them. Furthermore, since the DDT ban would do away with the double taxation of profits, India would become a more alluring destination for foreign investment. Under the new arrangement, shareholders will tax dividends based on their applicable tax rate. For instance, a shareholder in the 30% tax bracket will pay 30% tax on the dividend they receive.
Dividends paid over ₹5,000 are subject to a TDS deduction under the new dividend taxation scheme. Ten percent of the total dividend payment amount would be withheld for this TDS. As soon as the IT return is filed, this deduction will become a tax credit. You can also submit Form 15G/15H to employers to request that they not deduct any TDS If your yearly gross income is less than the tax exemption threshold.
Other Considerations for Dividend Distribution Tax
It is now simple to determine the indirect tax burden that was passed earlier on to the shareholders due to the DDT repeal.
Stockholders in lower tax categories can now add the genuine dividend to their income without having tax withheld at the source because DDT is no longer in force.
Shareholders who receive dividends but whose income is below the taxable level are exempt from income tax. However, this is only guaranteed if their income is below the taxable threshold following the receipt of dividends for the fiscal year.
DDT payments must be made independently of an organization's income tax obligations. The paid DDT cannot be deducted from or credited to the corporation.
Under Section 115BBD, dividends received by an Indian organization from its foreign subsidiary are qualified for a 15% deduction in taxes.
There is no DDT owed if a dividend is given to a person in the New Pension System Trust's name or on its behalf.
According to the Act, the taxpayer is not allowed to make any allowances, set off losses, or deduct any costs from income received in the form of dividends.
Conclusion
Businesses that distribute dividends to their shareholders are subject to the Dividend Distribution Tax (DDT) imposed by the Indian government. However, the firm deducts the tax before giving the stockholders their dividends. This tax is intended to guarantee that the government receives an equitable portion of the business's earnings. Understanding the DDT is, therefore, crucial for both business owners and shareholders as it affects their overall tax liabilities.
FAQ
Q1. How much dividend is tax-free in India?
In India, dividends are tax-free up to a specific amount. The dividend has an exemption of ₹ 5,000.
Q2. Is the dividend income taxable in the hands of individual investors?
Individual investors' dividend income is taxable following the repeal of the Dividend Distribution Tax (DDT) in 2020.
Q3. Who should opt for the dividend scheme?
Although they offer great returns, equity-oriented funds may not be the best option for investors looking for steady income. Despite their allure, dividend payouts reduce the amount you invested and interfere with compound interest, which prevents the long-term accumulation of wealth. The new tax law, on the other hand, encourages equity's potential for exponential development, which makes it the better choice if you have a long-term, patient investment horizon.
Q4. Can the TDS deducted on dividends be claimed back?
Yes, when you file your income tax return, you can claim the TDS deducted as a credit against your overall tax liability. Refunds are available if the entire amount of taxes paid (including TDS) is greater than your tax obligation.
Q5. How does one avoid double taxation on dividend income?
Dividends subject to taxation in the countries where the firm is headquartered and the shareholder resides may result in double taxation. The Double Taxation Avoidance Agreement (DTAA) between the two nations provides relief from this. When filing returns, make sure to include overseas dividend income and the appropriate tax credit.
Q6. Is Dividend Distribution Tax applied to the amount paid by the company to investors?
As of the 2020 Budget, India does not have a dividend distribution tax. Companies are no longer obligated to pay Dividend Distribution Tax as a result of the Indian Finance Minister's demolition of the DDT in the 2020 budget year.
Q7. What is Corporate dividend tax?
The tax levied on the dividend sent to shareholders is known as the corporate dividend tax. It is given based on the declared or actual dividend for the year. In order to prevent double taxation, dividend tax is excluded for shareholders of a corporation that is paying it.
Q8. Is corporate dividend tax calculated on unclaimed dividends?
Unclaimed dividends are indeed subject to taxation. Regardless of whether they are actually claimed, they are recorded in your tax return for that fiscal year and are treated as income when they are first declared and payable.
Q9. Is a dividend from an Indian company taxable?
As per Section 194, in case the aggregate amount of dividends paid to a shareholder during the financial year exceeds Rs. 5,000, the Indian firm is required to deduct tax at the rate of 10% from the dividends given to resident shareholders.
Q10. What is section 115O of the Income Tax Act?
A tax known as the dividend distribution tax (DDT) is levied on the dividend amount when a domestic business pays its shareholders dividends. In accordance with Section 115O, the DDT rate is 15% of the gross dividend amount.
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