Dividend Distribution Tax (DDT) Explained

Much talk on removal of Dividend Distribution Tax (DDT) over the years to reduce the tax burden. With the changes in the budget 2020, the applicability of taxes were a bit deferred towards to the shareholder from the company. Covers Dividend Distribution Tax, it's applicability, and changes proposed in the Budget 2020.

This document covers

What is DDT
Proposed Changes
Taxability of Dividend received before
Taxability of Dividend received on
Conclusion

1. What is Dividend Distribution Tax (DDT)?

Dividend usually refers to the distribution of profits by a company to its shareholders. Section 2(22) of Income tax act covers the Dividend. Dividend shall also include the following.

Distribution of accumulated profits to shareholders entailing release of the company’s assets.
Distribution of debentures or deposit certificates to shareholders out of the accumulated profits of the company and issue of bonus shares to preference shareholders out of accumulated profits.
Distribution made to shareholders of the company on its liquidation out of accumulated profits.
Distribution to shareholders out of accumulated profits on the reduction of capital by the company; and
Loan or advance made by a closely held company to its shareholder out of accumulated profits.

2. Proposed Changes in Budget 2020

Finance Minister has abolished the Dividend Distribution Tax (DDT) in Budget 2020 and made a move to classic system of taxation wherein dividends are taxed in the hands of investors.

3. Taxability of Dividend received before 01/04/2020.

In the Hands of Company: The Companies are liable to pay Dividend Distribution Tax (DDT) @ 15% on the declared dividend.
In the Hands of Shareholder: Dividends are exempt in the hands of shareholder up to Rs 10 Lakhs u/s 10(34). The Taxpayer is not required to pay any taxes on the dividend Income up to Rs 10 Lakhs. Dividends received in excess of Rs 10 Lakhs is taxable @ 10% (Plus applicable surcharge and education cess)

4. Taxability of Dividend received on or after 01/04/2020.

The Taxability of dividends in the hands of company as well as shareholders from AY 2021-22 are as follows

In the hands of Company: The Domestic Companies are not liable to pay DDT on dividend distributed to shareholders. However, the companies are required to deduct the TDS @ 10% on the dividend if the dividend distributed or paid to a shareholder during the financial year exceeds Rs 5000.
In the hands of Shareholder: The Dividends received by shareholder are fully taxable in the hands of shareholders @ applicable slab rates

5. Conclusion

Hon’ble FM Sitharaman made a great move in abolishing the DDT to encourage companies, equity markets and inviting foreign companies and funds to invest in Indian Companies. But such DDT is expanded in the hands of the receiver (shareholder) as it is now fully taxable, as this will affect many investors who receive Dividend up to 10 Lakhs in a year.

On the other hand, the abolition of DDT made all investors equal on the payment of taxes related to Dividends whether they are rich or small-time investors.

If you have dividend income this year, make sure it is part of the advanced tax calculation to avoid any interest on such at the time of filing your taxes. Check with Team EZTax.in in case you need a consultation and/or advanced tax calculation & filing service.