Important Keyword: Budget 2020, DDT, Dividend Income.

DDT: Dividend Distribution Tax

Dividend Distribution Tax (DDT) was a tax levied on companies that distributed dividends to their shareholders, akin to Tax Deducted at Source (TDS). DDT ensured that the government received its share of tax revenue from corporate earnings by collecting it from the company before disbursing dividends to shareholders. However, as of April 1, 2020, the DDT has been abolished.

What is a Dividend Distribution Tax?

DDT was formerly levied on dividends distributed by domestic companies to their shareholders under Section 115O of the Income Tax Act. This tax was paid by the company, leading to the exemption of dividend income in the hands of the shareholder under Section 10(38).

However, the landscape changed with Budget 2020, as DDT was abolished. Consequently, dividend income became taxable in the hands of the shareholder, and DDT ceased to apply to dividends paid on or after April 1, 2020.

Under the previous regime:

• Domestic companies were obligated to pay DDT as per Section 115O, within 14 days from the date of declaring, distributing, or paying the dividend, whichever came first.
• Failure to pay dividends within 14 days incurred an interest of 1% payable by the company from the due date to the date of payment to the government.

In the context of Budget 2021:

• Dividends paid to Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are now exempt from Tax Deducted at Source (TDS).
• Advance Tax liability arises on dividend income only upon declaration or payment of dividends, considering the challenge shareholders face in accurately estimating dividend income.

Dividend Distribution Tax Rate

Indeed, under Section 115-O of the Income Tax Act, a Domestic Company that distributes or declares dividends is obligated to pay DDT at a rate of 15% on the gross dividend. When calculated on the gross dividend, the effective rate amounts to 17.65%.

Example on DDT

To calculate the Dividend Distribution Tax (DDT) that the company should pay:

1. Calculate Gross Dividend: Gross Dividend (100%) = Net Dividend (85%) + DDT (15%) Gross Dividend = INR 5,00,000 * 100/85 = INR 5,88,235.29
2. Calculate DDT on Gross Dividend: DDT = Gross Dividend * 15% DDT = INR 5,88,235 * 15% = INR 88,235

Thus, the effective DDT rate is 17.65%. However, this rate does not include cess and surcharge. After factoring in cess and surcharge, the effective rate is 20.56%.

Abolishment of Dividend Distribution Tax

Under Budget 2020, the DDT was abolished by the finance minister. Consequently, companies are no longer obligated to pay DDT. This change means that dividend income, previously exempted up to INR 10 lakhs, is now taxable for investors. The taxable dividend income is subject to slab rates. With dividend income becoming taxable, Tax Deducted at Source (TDS) becomes applicable. The Finance Minister introduced a new TDS section, Section 194K, specifically for TDS on dividends from Equity Mutual Funds. Additionally, the existing Section 194, pertaining to TDS on dividends from Equity Shares, was amended.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/