Dividend Distribution Tax (DDT)

Being a shareholder of a company requires that you understand all aspects of being a shareholder and the regulations that are related to the shareholding of a company’s stock. Today, stock is the go-to investment option for several Indian investors, and as more and more people explore and engage in the Indian stock market, it is vital to know information about stock-holding, especially where taxation-related details are concerned. This is where the Dividend Distribution Tax (DDT) comes into the picture.

DDT was essentially a tax levied on companies that issued dividends to shareholders. However, stakeholders argued that dividends are a part of the income of shareholders and should be taxed as such. Let us delve further into the area of DDT and how the taxation process stands in the present day.

What is the Dividend Distribution Tax?

Some investors who hold the shares of companies and are shareholders in the company receive dividends from the company. The company distributes these dividend amounts periodically, and dividends are part of the company profits shared with investors/shareholders. Dividends are part of your income as an investor and are, thus, liable for taxation.

The Dividend Distribution Tax (DDT) was introduced by the Indian government in 1997, and when companies issued dividends to shareholders, the companies were liable to pay tax to the government. Hence, companies deducted the amount of tax from individual dividend payments and paid the tax. When this regulation came into force, corporations were liable to pay 15% of the gross dividend to the Indian government within two weeks of the dividend declaration. After the surcharge and cess, the amount sometimes increased.

In 2018, a DDT on mutual fund schemes was also proposed, and in 2020, the DDT was officially abolished by the Indian government. As it stands today, the dividends that investors receive from companies are liable for taxation, but instead of companies incurring the burden of tax, the taxpayer (shareholder/investor) is liable to pay tax according to their tax bracket.

Example of DDT Rate

The Dividend Distribution Tax which was previously required to be paid by companies when distributing dividends has now been repealed. However, it is relevant to understand how companies calculated this tax and carried the burden of taxation. The following example shows how the DDT taxation rate was applied:

Imagine that a company announced a dividend amounting to a total of Rs. 2,00,000. The following steps will be applied to calculate the DDT:

• Step 1: The first step is to decide the gross dividend. This is calculated at 17.65% on Rs. 2,00,000. The resultant amount, Rs. 35,300, will add to Rs. 2,00,000. This amounts to 2,35,300.
• Step 2: Once you have the gross dividend amount, this is taxed at a DDT of 15%. This amounts to Rs. 35,295. Thus, the dividend distribution tax rate of 15% applied to this amount equals 35,295.

Who is required to pay Dividend Distribution Tax (DDT) and at what rate?

Dividend Distribution Tax meaning may be clear to you now, but you must know how it was applicable and at what rate. When the DDT law was in effect, before 2020, companies were required to pay the Indian government a Dividend Distribution Tax when they announced that a dividend was to be distributed among shareholders of respective companies. According to Section 1150 of the Income Tax Act, companies were taxed at 15% of the total dividends paid out.

Furthermore, according to Section 2 (22)(e), there was also a tax levied on presumed profits of the company and this was incurred by companies at 30%. According to the Finance Act of 2020, this DDT has been repealed and companies are no longer taxed. The tax burden falls on the individual shareholder/investor who receives the dividend and is taxed according to their tax bracket. Additionally, investors investing in mutual funds are taxed as they earn an income through their investment.

When is DDT to be paid?

When the Dividend Distribution Tax was in force, before 2020, it had to be paid within 14 days of the declaration or payment of the dividend. In case companies failed to make timely payments, they were liable for interest payments at the rate of 1% of the dividend distribution tax from the date of non-payment to the date of the tax payment. The provisions for payment and non-payment of the DDT were provided in Section 115P of the Income Tax Act.

Benefits of abolition of the Dividend Distribution Tax or DDT

Today, if you are a shareholder and have invested in company stock, you may receive dividends from time to time. These must be declared as part of your income and are taxed based on your income bracket tax range. Mutual fund investment income is also taxable. So, if you were to invest in mutual fund schemes on say, the Bajaj Finserv Mutual Fund Platform, you would be liable to pay tax. Although individual investors have to pay tax on their investment income from stocks and mutual funds, there are benefits to the abolition of the DDT, as mentioned below:

• The abolishment of DDT aimed to reduce the taxation impact, eliminating preferential treatment to any investor type or class.
• The move has been viewed as a positive effort to establish India as an appealing investment destination.
• The abolishment of the tax makes the equity markets attractive to Indian investors.

Dividend Distribution Tax on Mutual Funds

Mutual fund investment income is also subject to DDT according to provisions laid down by the Ministry of Finance in 2018. As mutual fund schemes may yield an income for investors, investors are liable to make tax payments on these incomes in the following manner:

• The Dividend Distribution Tax applies to Debt-focused mutual fund schemes, at a tax rate of 25% of the income earned from these investments.
• Mutual fund schemes which are equity-oriented are not liable for taxation on income generated from such schemes.
• Mutual fund schemes with a concentration of equity (and a blend of debt funds) are taxed on the income they generate, at a rate of 10%.
• Dividends generated by mutual fund schemes are exempt from any tax liability of the mutual fund company, but individual investors receiving this dividend income are liable to pay tax.

Special provisions related to Dividend Distribution Tax

Once you have understood the Dividend Distribution Tax meaning, you will further be able to grasp aspects of this taxation scheme. Under the DDT scheme of taxation, there were some special provisions associated with the tax:

• If income generated through a dividend exceeded Rs. 10 lakh, tax was levied at the rate of 10% for individual investors, partnership firms, Hindu Undivided Family (HUF), and private trusts.
• When a domestic holding corporation received income in the form of a dividend from its domestic subsidiary firm, the holding company was liable for taxation when it announced or declared a dividend.

Who should opt for the Dividend Distribution Scheme?

Certain investments pay dividends regularly, and this is the appeal for most investors in the stock market who find dividend payouts attractive. They act as a source of income, although they may be liable for taxation. In terms of mutual funds, equity-oriented funds may not be considered by those who want a compounding effect in their returns. Although certain equity-focused schemes pay you dividends, these may deplete the amounts invested and disturb the compounding effect that mutual funds possess to grow your wealth. This may disrupt long-term capital appreciation if you are looking at substantial returns in the long run. However, investing in pure equity may potentially give you substantial returns in the long term, and according to the new tax regime regulations, you stand to benefit.

Considerations for DDT Tax

Here are some details you should consider about the Dividend Distribution Tax:

• Dividend Distribution Tax (DDT) is a tax that was to be paid by Indian companies on the dividends distributed to their shareholders. DDT was a type of indirect tax.
• DDT aimed to avoid the double taxation of profits - at the corporate level on one hand and the shareholder level on the other.
• Companies were required to pay DDT of up to 20.56% on the total amount of dividends paid to shareholders, raising the tax burden on companies.

Conclusion

DDT was removed as a tax liability on companies from 2020. The abolishment of this tax has resulted in a level playing field for investors from all strata, where taxation on investment is equal and dependent on the amount of investment made and your unique tax slab. The move to remove the DDT was met with approval by stakeholders and stock investors alike as taxation was now fair for every investor and not applied by companies before dividends were distributed.

Investment is not a challenge whether you are a newbie or an experienced hand. What’s more, you do not have to be confused when you invest these days. While there are several investment options out there, you can consider the best suited to your individual needs and make your choice from an array of avenues like stocks and mutual funds, to less risky bonds and government securities. If you tend to be risk-averse, you can always navigate your way to the user-friendly Bajaj Finserv Mutual Fund Platform, where you get more than 1000 mutual fund schemes to match every type of investor goal. There is no time like the present to start, so what are you waiting for? Head out and invest now!