When investing in shares or mutual funds, the primary motivation is the potential growth in value. Whether it's shares or mutual funds, you invest in them expecting their NAV during redemption to be higher than when you bought them.
However, there is one more incentive that primarily drives investment decisions. This incentive is the dividend paid out by the company to its shareholders.
Companies may choose to distribute a part of the profit earned amongst their shareholders from time to time. This distribution is in the form of a dividend paid per share of the company. This dividend distribution attracted a dividend distribution tax (DDT) earlier, until 2020, when the government abolished DDT.
Before you learn about the now-abolished DDT, let us look at dividend taxation.
According to the then-existing DDT, a company issuing a dividend was required to pay the government a tax of 15% on the gross dividend amount, as per section 115O of the Income Tax Act.
With the DDT in place, the income through dividends was exempted from taxes by individual investors or shareholders.
Therefore, the total burden of tax fell on the dividend-paying company. This tax burden was then passed to the individual investors.
The DDT tax was deducted at the source by the dividend-distributing company. Then, these companies used to pass the remaining amount to the investors.
After the abolition of DDT, the applicable TDS on dividends is 10% if the shareholder's dividend income exceeds ₹5000 for the financial year.
This used to be how the dividend distribution tax was calculated. Suppose a company, ABC declared a dividend of, say, ₹5,00,000 on 10 April 2019. Let’s calculate the dividend distribution tax the company was required to pay.
Now, the company’s gross dividend is its net dividend added to its DDT. Its net dividend is 85%, and its DDT is 15%. Both of these are the proportions of the gross dividend.
We first need to calculate the gross dividend to get all the figures for calculating the DDT.
Gross Dividend (100%) = Net Dividend (85%) + Dividend Distribution Tax (15%)
Gross Dividend = ₹5,00,000 * 100/85 = ₹5,88,235.29
Now that we have calculated the gross dividend let’s calculate Dividend Distribution Tax on the Gross Dividend:
DDT is 15% of the Gross Dividend
Therefore, Dividend Distribution Tax = ₹5,88,235 * 15% = ₹88,235
₹88,235 is 17.65% of ₹5,00,000
Therefore, the effective Dividend Distribution Tax rate was 17.65%. However, this did not include cess and surcharge. After calculating cess and surcharge, the effective rate was 20.56%.
Since the Dividend Distribution Tax has been abolished, India's effective Dividend Distribution Tax rate is now zero.
Yes. Dividend income which was earlier exempted up to ₹10 lakh, has become taxable for the investor. Earning a dividend adds to your income and is taxable according to your income tax slab.
Tax Deducted at Source (TDS) becomes applicable as the dividend income is now taxable. Therefore, companies are now required to deduct tax at 10% from dividends distributed to the resident shareholders if the total dividend paid during the financial year to a shareholder is more than ₹5,000.
The dividend distribution tax was applicable on both equity and debt-based mutual funds.
For example, if your income falls under the 30% income tax slab, you must pay 30% taxes on the dividend received.
Dividend Distribution Tax (DDT) is a tax that applies to the dividends paid by a company to its shareholders from its profits. DDT is levied on the company, not on the shareholders, and is deducted at the source before the distribution of dividends. The rate of DDT is 15% on the gross amount of dividend, which amounts to an effective rate of 20.56% after including surcharge and cess. However, for dividends referred to in Section 2 (22) (e) of the Income Tax Act, the rate of DDT is 30%. DDT must be paid within 14 days of declaration, distribution or payment of dividend, whichever is earlier, otherwise, interest will be charged at 1% per month. DDT was abolished in Budget 2020 and the taxation of dividend income was shifted to the investors from the companies.
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Not anymore. There used to be a Dividend Distribution Tax rate in India. However, the government abolished the Dividend Distribution Tax during the 2020 union budget.
Therefore, companies are no longer required to pay Dividend Distribution Tax.
The dividend isn't exempted from income tax, and all your dividends will be counted in your income. The income tax slab you fall into, including your dividend, will decide the tax percentage you'll pay.
