Dividend Distribution Tax (DDT): Rates and Calculations

What is Dividend Distribution Tax?

A domestic company in India that pays dividends to its shareholders is liable to pay a Dividend Distribution Tax (DDT) tax on the gross dividend amount. DDT is a tax paid by the company that declares the dividend. DDT was introduced by the Finance Act of 1997 and is applicable at the rate of 15%. The effective rate of DDT was 17.65%, excluding surcharge and cess. For dividends falling under Section 2 (22) (e) of the Income Tax Act, the tax rate is 30%.

Who is liable to pay DDT, and at what rate?

A domestic company that pays dividends to its shareholders must pay a tax on the dividend amount, called the dividend distribution tax (DDT). The DDT rate is 15% on the gross dividend amount as per Section 115O. i.e., the effective DDT rate is 17.65%* on the dividend amount. However, for dividends that fall U/S 2(22)(e) of Income Tax Act, the DDT rate is 30%.

For example, suppose a company declares a dividend of Rs 2,00,000. The DDT calculation is as follows:

• Step I: Calculate the grossed-up dividend by adding 17.65% of Rs 2,00,000 to Rs 2,00,000. This gives Rs 2,35,300.
• Step II: Calculate DDT on the grossed-up dividend at 15%. This gives Rs 35,295. This is the DDT payable by the company on Rs 2,00,000.

*This rate does not include surcharge and cess. If surcharge and cess are added, the effective DDT rate would be 20.56%.

When is DDT to be paid?

The Income Tax Act mandates that DDT must be paid by any domestic company that declares or distributes dividends within fourteen days from the earliest of the following events:

• The declaration of dividends
• The distribution of dividends
• The payment of dividends

If the dividend is not paid within the specified time, interest at the rate of 1% per month/proportion thereof will be charged on the amount of tax payable.

The interest will be evaluated from the day after the due date of payment till the date of actual payment to the govertment.

Dividend Distribution Tax (DDT) – Special Provisions

Individuals, HUFs, partnership firms, and private trusts who earn more than Rs 10 lakh in dividend income will have to pay a tax of 10% on the excess amount.

If a domestic holding company gets a dividend from its domestic subsidiary company, then the dividend distribution tax (DDT) will be calculated as follows:

Dividend amount declared/distributed/paid in the year (minus) Dividend amount received by holding company in the year (subject to certain conditions)

Dividend Distribution Tax on Mutual Funds

Mutual funds are subject to DDT in different ways.

• Debt-oriented funds pay DDT at 25 percent (29.12 percent with surcharge and cess).
• Equity-oriented funds were exempt from DDT until Budget 2018, which imposed a 10 percent tax (11.648 percent with surcharge and cess).
• The fund holder does not pay tax on the dividend received from mutual funds.

Considerations for DDT Tax

• The abolition of DDT has simplified the computation of indirect tax liability that was earlier transferred to the shareholders. Now, stockholders in lower tax brackets can include the actual dividend in their income without any tax deduction at source.
• Dividends received by shareholders whose income falls below the taxable limit are exempt from income tax. However, this depends on whether their income remains below the taxable limit after adding the dividends for the financial year.
• DDT is a separate tax from the income tax payable by the company. The company cannot claim any deduction or credit for the DDT paid.
• An Indian company that receives dividends from its foreign subsidiary is eligible for a 15% tax concession under Section 115BBD.
• No DDT is payable if a dividend is paid to a person on behalf of or in the name of the New Pension System Trust.
• The taxpayer cannot claim any expenses, allowances, or losses against the income earned as dividends under the Act.