Dividends refer to profits realised by companies which it shares with its equity shareholders. When a company distributes these profits amongst its shareholders, it has to pay taxes on it, known as Dividend Distribution Tax (DDT).
Dividends distributed by mutual funds to their unit holders are also taxable. In both cases, DDT is deducted at source and only the net dividend (after deducting tax) is paid to investors.
DDT Paid by Companies
As mentioned under Section 115-O, all the domestic companies declaring dividend or distributing the same will be required to pay 15% DDT on gross dividend.
The calculation of DDT is done through a complex gross payment method. Thus if a company has declared a dividend of Rs 10 per share, it will have to pay DDT of ((100*0.15/(1-0.15)) = Rs 1.1765 per share).
In addition, those investors who receive more than Rs 10 lakh in stock dividends per year, have to pay tax at 10% on the excess amount.
When should the organisation pay DDT?
According to the provisions under Section 115-P, the DDT is required to be paid by the organization or the individual within 14 days of declaration of dividend, payment or distribution of the amount whichever is the earliest.
In case the dividend amount is not paid within 14-days, the company becomes liable to pay the same in form of interest at the rate of 1% of DDT from the date on which it was subjected to be paid, till the date it is paid.
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DDT Paid by Mutual Funds
Dividends paid by equity mutual funds are subject to DDT at 10%. This amount is also deducted by the fund house at source and only the net amount is paid to the investors. Hence dividends are tax-free in the hands of investors, because the tax has already been deducted by the fund.
Note that this rate is the same as the long term capital gains tax rate on mutual funds (10%). However you also get an annual tax exemption on long term capital gains up to Rs 1 lakh. This is not available for mutual funds.
This makes capital gains in mutual funds a more tax efficient way of booking your profits than getting dividends in mutual funds.
Dividends paid by debt mutual funds are subject to DDT at 25%. After you add health and education cess and surcharge, the rate is approximately 29%. This is very close to the highest tax bracket in India at 30%.
However, there is no additional tax on mutual fund dividends even if you receive more than Rs 10 lakh in dividends. This provision only applies to dividends from stocks.
Other Provisions under DDT
Here are the provisions and terms which are to be taken care of relating to DDT:
- DDT is not included in the income tax liability of a company. It is calculated and paid over and above the income tax.
- In case dividend is paid to a person on behalf of the NPS trust, no DDT stands payable
- There exists a concessional rate of tax of 15% on dividend received by a domestic company from its foreign based subsidiary (as quoted under Section 115BBD)