What are Dividends?
The dividend is a sum of money regularly paid by a company to its shareholders out of its profits. In short, it is a return that a company gives to its investors. It is announced every year and are generally paid to investors from the profits that a company may have made in that year. The profit that is made by the company is split into parts, with each investor getting a certain percentage of the profit. These percentages are referred as dividends.
Dividends are of two types. They are,
- Preferred dividends: These offer a fixed rate of return
- Variable dividends: These are determined by the profits that the company makes in the year.
What is Dividend Distribution Tax (DDT)?
When a company announces dividends, the amount that is paid as a dividend is liable for the tax. This tax is known as the DDT (dividend distribution tax). DDT is levied on companies by the Indian Government according to the dividend paid to the investors. This is only applicable to those payments that are made to investors by companies in the form of dividends. DDT is payable by the company that is announcing the dividends.
Companies are of two types. They are,
- Domestic Companies
- Foreign Companies
Investors can receive dividends from any of these companies. The taxability for each of these company is as follows.
If the investor has invested in a domestic company then the dividends that are announced by that company are not taxable for investors i.e. investors won’t have to pay any tax on the income they received from the domestic company.
If the investor has invested in a foreign company then the dividends that are announced by that company are taxable i.e., investors have to pay tax on the income they received from the foreign company.
Mutual Fund Investments: The DDT (dividend distribution tax) is also applicable to mutual fund investments but since investments in domestic companies are exempt from this DDT, it is applicable to investments in the money/debt markets.
What is Dividend Distribution Tax Rate / Dividend Tax Rate?
Investors no need to pay tax on the income from dividends. The dividends from the domestic companies are not taxable, but the investors need to pay tax on the dividend from foreign companies. This is not to say that there is no DDT levied at all. Under Income Tax Act, 1961, there is a levy of 15% of the dividend declared as distribution tax. Additional surcharge of 12% on DDT, Education Cess of 2% and SHEC (Secondary and Higher Education Cess) of 1% is levied.
According to the Union Budget 2007, India, the DDT (dividend distribution tax) is 15%.
What are the changes introduced in DDT by Finance Act 2014?
There is no change in the rate of tax i.e. 15%, but the manner of the application has been changed.
Earlier Dividend Distribution Tax at the rate of 15% was computed with respect to the Net Amount paid as Dividend to the Investors. As the DDT was levied on the Net Amount Value instead of the Gross Amount Value, the effective rate of tax was lower than 15%.
So, the Finance Act 2014 has amended Section 115-O in which the dividends would be required to be grossed up for the purpose of payment of DDT (Dividend Distribution Tax). Let’s see the example for detailed information.
Earlier before introducing the amendment, if the Dividend Paid was Rs 100, the DDT to be paid was Rs. 15.
After introducing the amendment, if the dividend paid by a company is Rs. 100, then the DDT would be as follows.
Dividend (Net Amount of Dividend) = Rs 100
Increase by (100*0.15)/(1-0.15) = Rs. 17.65
Dividend (Gross Amount) = Rs. 100
DDT at the rate of 15% of Rs. 100 = Rs. 17.65
Therefore, from the above example, we can say that with the introduction of this amendment under finance act 2014, the amount to be paid as Dividend Distribution Tax (DDT) has increased.
How is Dividend Distribution Tax Calculated?
As per the Section 115-O, there are some rules while calculating the DDT. They are,
- Dividends that are once taxed, cannot be taxed 2nd time.
- The profits made by domestic company won’t be included in the profit while computing the DDT.
- If the subsidiary is a foreign company then the Dividend Distribution Tax will be paid by the parent company of the income from the subsidiary.
- The responsibility for paying the Dividend Distribution Tax lies with the company & the principal officer.
- The Dividend Distribution Tax has to be paid to the govt within 14 days from the declaration, distribution or payment of dividends.