If a company is earning profit then they provide it to the shareholders of the company which is known as dividend. Dividend is income for shareholders so it is taxable in the hands of tax payer.
Though, Income tax act 1961 provides exemption of dividend which is receive from an Indian company by imposing a tax which is called as dividend distribution tax which shall be on the company who is paying the dividend. The provisions regarding DDT is governed by Section 115O.
WHO IS REQUIRED TO PAY DDT?
Domestic company who is either declaring the dividend or distributing the dividend is needed to pay DDT at the rate of 15% which shall be on the gross amount of dividend, it is specified under Section 115O. Hence, the effective rate of DDT will be 17.65% on the amount of dividend.
DDT under Section 115O is 15% but if there is a case of dividend which is referred in Section 2(22)(e) of the act then it will be risen from 15% to 30%.
The DDT stands withdrawn with effect from 1 April 2020.
PERIOD FOR WHEN DDT IS TO BE PAID:
DDT shall be paid within 14 days of either declaring or distributing dividend OR payment of dividend made whichever is earlier. If the company is not paying the tax within 14 days then they will be liable to pay interest which will be at the rate of 1% of DDT. The interest will be liable to pay by the company from when the DDT was actually payable till the time when company pays the DDT to the government. This provisions are specified in Section 115P.
1. If an individual, Hindu Undivided Family or Partnership Firm and Private Trust are receiving income which is in a dividend way and it is exceeding Rs 10 Lakhs then it will be chargeable at the rate of 10%.
2. If a holding company is receiving dividend from its subsidiary company, then whenever the holding company will distribute dividend the amount for which dividend liable for DDT will be equal to:
(Dividend declared/ distributed/ paid during the year) – (Dividend received by holding company during the year).
DDT ON MUTUAL FUNDS:
Mutual funds are also liable for DDT:
1. If the funds is debt oriented then DDT will be at the rate of 25% plus surcharge and cess which will result into 29.12%.
2. If the funds are equity oriented then they are exempted from DDT. But it was initiated in budget 2018 that even equity oriented funds will also be liable for DDT at the rate of 10% plus surcharge and cess which will result into 11.648%.
3. Dividend which is received by investor is totally exempted in the hands of the person who is holding the funds.
IMPACT OF DDT ON THE INVESTOR:
Mutual fund which invests less than 65% of whole in the equity those funds are termed as non-equity funds which are like debt funds for only taxation purposes. Investors who looks for periodic income or regular income from dividends of funds which are equity oriented needs to reconsider their strategy, and that is because of taxes which are on returns will be reduced than in hand return. Though, the dividends are tax free for the investors. The house of fund will reduce the DDT before any payment made to dividend.
As per the Budget 2020, the FM has abolished Dividend Distribution Tax (DDT). Now the incidence of dividend income taxation is shifted to investors from the companies.
Author- Adv.Shivam Kumar
Legal and content Executive, Taxblock India Pvt. Ltd