The Dividend Distribution Tax (DDT) is a tax levied on total dividends distributed by domestic corporations to their shareholders. The amount of DDT payable shall be determined according to the number of shares held by each shareholder and whether or not such shares are listed or unlisted.
For listed shares, if a shareholder disposes of its whole holding in that year and then perhaps acquires it again in the same year, no tax is due because the fractional credit is deemed to have offset the amount of DDT payable. However, in the case where a shareholder disposes of part of its holding in that year, the tax due is calculated using the fractional method which takes into consideration the adjusted cost base.
However, if a shareholder disposes of part of its holding in that year, the tax due is equal to the full amount of DDT payable multiplied by a fraction which determines how many days such shares were held during such year and divided by 365 (days). It should be noted that shares acquired during the year are treated as if acquired on the last day of the year.
When a company decides to pay out dividends, it redistributes its after-tax profits with an element of personal income for investors and shareholders in that company. Hence, the distribution of dividends results in income coming into the hands of its shareholders who may eventually be required to pay tax on it.
The distribution of dividends is subject to two kinds of taxes – dividend distribution tax (DDT) and withholding tax (WT).
Dividend Distribution Tax (DDT) is an indirect tax applicable in India on the transfer of listed equity shares. DDT was applicable at 8% (5% Central Tax + 3% Secondary and Higher Education Cess) with respect to Indian companies, but now it is proposed that this may be raised up to 15%. The Eighth Finance Commission has expressed concern that the Central Sales Tax, Purchase Tax, and Dividend Distribution tax should be abolished because these taxes distort investment decisions.
“Dividends” means any distribution made by a company, whether in money or otherwise, out of profits arising from the business of the company to its shareholders or members. It includes all interim dividends and also final dividends.
The DDT is applicable to all equity shares which form a part of any listed security and where such shares are transferred by any mode (in other words, the DDT is liable to tax on the transfer of equity share in listed securities), other than transfers under:
Thus, if somebody receives a dividend from any other source, the DDT is not applicable. Dividend Distribution Tax is also not payable when shares are transferred by Gift or in case of succession to the estate of an individual (i.e., when shares are inherited).
Tax payable at various rates on different types of dividends:
A person who receives dividends from a company that is liable to pay DDT has to pay dividend distribution tax himself on the dividend he received. This tax is paid at his income tax rate (plus surcharge and education cess). The person receiving the dividend has also to fill Form No 16 in respect of dividend distribution tax.
The following table illustrates how much tax would be payable on dividends received:
- The tax on dividend income of Resident individuals is levied under section 115BBDA. A company pays dividend distribution tax at the flat rate of 15% of the total amount of dividend distributed by it to its shareholders. This provision came into effect from 1 June 2012, replacing the earlier system where DDT was payable at graduated rates on dividends distributed by a company.
- In the case of a dividend received from a foreign company, when it is present in India, then DDT shall be deducted from such dividends when they are payable out of profits arising from business or profession carried on in India through a branch or agency in India. In other cases, i.e., when a dividend is received from a foreign company not present in India, then DDT shall be deducted when it is remitted to India by the company.
As per section 115BBE, Dividend Distribution Tax at 15% of total dividend paid or credited becomes payable on certain conditions even if no tax was deducted at source. Such cases are-
- Payment of Dividends through Credit Cards, Debit Cards, and online banking: 15% DDT becomes payable on such dividends even if no tax was deducted at source (i.e., before a credit to the bank account). It is because in such cases it cannot be assured that tax has been paid by the company or intermediary while making payment.
- Dividend from which tax was not deducted at source: In this case, even though no tax was deducted on dividend while it is being distributed, nevertheless 15% DDT becomes payable when the amount of such dividend is credited to a bank account of a person resident in India or while remitting outside India by the banking company.
- Dividend from foreign companies: Here tax is payable under section 115BBE as such companies are not required to deduct tax at source before payment of dividend.
- Dividend on unlisted shares: 15% DDT becomes payable even if no tax was deducted at source when dividends arising from unlisted shares are credited to a bank account or remitted outside India.
- Payment of commissions on purchase/sale of shares (by broker): 15% DDT becomes payable even if no tax was deducted at source when commission is paid on purchase/sale of shares by any broker, excluding stock brokers and sub-brokers who are not required to deduct tax at source under section 195 .
- Payment of commission to non-resident brokers: 15% DDT becomes payable even if no tax was deducted at source when commission is paid to a broker resident outside India. This provision came into effect from 1 June 2012 and replaced the earlier system wherein such commission could be paid without deduction of tax only if certain conditions are satisfied.
- Payment of interest on securities: 15% DDT becomes payable even if no tax was deducted at source when interest is paid in respect of security which does not carry any element of dividend or income from business or profession, but later it is shown that the payment was in fact a disguised dividend. This provision came into effect on 1 June 2012.
- Payment of interest by NBFC’s: 15% DDT becomes payable on payment of interest on securities even if no tax was deducted at source when such interest is paid to a Non-Banking Financial Company (NBFC). This provision came into effect on 1 June 2012.
- Payment of fee by mutual funds to distributors: 15% DDT becomes payable on the fee paid, being commission or remuneration, of any kind paid or credited by companies (other than companies registering under section 12AA) which are engaged in the business of collective investment in securities, when it is paid directly or indirectly to a distributor. This provision came into effect from 1 June 2012.
- Payment of interest by Mutual Funds: 15% DDT becomes payable on payment of interest even if no tax was deducted at source when such interest is paid to a Mutual Fund in the course of business by any person other than a company or institution carrying on the business of banking or insurance or broking or chit fund. This provision came into effect from 1 June, 2012.
- Payment of interest by property funds to investors: 15% DDT becomes payable on payment of interest even if no tax was deducted at source when such interest is paid or credited by a company engaged in the business of providing services for acquisition, development, construction, maintenance or management of the commercial or residential property to its investors. This provision came into effect from 1 June 2012.
- Payment of interest by Business Trusts to investors: 15% DDT becomes payable on payment of interest even if no tax was deducted at source when such interest is paid or credited by a business trust to its investors. This provision came into effect from 1 June 2012.
- Payment of fees by mutual funds to AMCs or Trustees: 15% DDT becomes payable on the fee paid, being commission or remuneration, of any kind paid or credited by an Asset Management Company (AMC) which carries out the functions of receiving money from investors and depositing it with a trustee for further investment in securities, and which also selects the said trustee, to such trustee. This provision came into effect from 1 June, 2012.
- Payment of interest by AMCs: 15% DDT becomes payable on payment of interest even if no tax was deducted at source when such interest is paid or credited by an investment manager registered under section 12AA to a mutual fund by way of commission or any remuneration when it is paid directly or indirectly in respect of securities. This provision came into effect from 1 June 2012
- Payment of interest to foreign venture capital investors: 15% DDT becomes payable on payment of interest even if no tax was deducted at source when such interest is paid or credited by a venture capital company engaged in the business of making investments into small and medium enterprises to a Non- Resident Indian who is a foreign venture capitalist. This provision came into effect from 1 June 2012.
The deduction for Dividend Distribution Tax is not available in the following cases:-
- Where the company is a subsidiary ;
- Where dividend has been deducted under any law or where tax has been deducted by an intermediary on account of a shareholder being a resident other than a company ;
- Where the dividend has been declared but has not been distributed or payment is pending; and
- In a case where a public company has paid excess deduction of Dividend Distribution Tax, it becomes eligible for claiming the refund.
Dividend Distribution Tax can also be used on mutual funds:
- DDT is applied to debt-oriented funds at a rate of 25%. (29.12 percent including surcharge and cess).
- DDT was not applied to equity-oriented funds, however. Budget 2018 included a ten percent levy on equity-oriented mutual funds (11.648 percent including surcharge and cess).
- In the hands of the fundholder, the dividend received by investors is tax-free.
When is Dividend Distribution Tax to be paid?
In case of non-payment within 14 days, the company would be liable to pay by way of interest at the rate of 1% of the DDT from the date following the date on which such DDT was payable till the time such DDT is actually paid to the government. These provisions are contained under Section 115P.
As per Section 115P of the Income Tax Act, DDT payable in respect of a dividend declared or distributed before 1st April 2007 shall be payable within fourteen days from the date on which such declaration or distribution was made, and for this purpose, tax stands collected at the time of making such declaration or distribution. In case of non-payment within 14 days, a company would be liable to pay by way of interest at the rate of 1% per month from the date following the date on which such DDT was payable till the time such DDT is actually paid to the government.”
“In case of dividend distribution after 1-4-2007, DDT shall be payable within thirty days from the due date for filing of return of income. In case of non-payment, DDT stands collected by way on interest at the rate 2% per month from the date following the date up to which it stood collected till such time it is actually paid to the government.”
As per section 115P of the Act, where a dividend distribution tax has not been paid in time, interest is payable by the company on any unpaid dividend distribution tax from the date following the date up to which it stood collected till such time it is actually paid. The rate of interest would be 1% per month of the amount due till the amount is actually paid to the government.”
At the time of paying the dividend, a fund house will deduct Dividend Distribution Tax [DDT] at the rate of 10% on the dividends over & above Rs. 1 Lakh. The fund house will then pay the remaining amount to you, net of all taxes.
Dividends declared but not paid remain taxable in the eye of law whereas Dividend Distribution Tax [DDT] is only deducted at the source when the dividend is declared & final payment is done.
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