Dividend Distribution Tax in India – Meaning, Rate & Abolition Explained

When it comes to taxation, people often find it very hard to understand which tax applies where. Whether it is the tax on mutual funds or just the GST, knowing the implications and features become really important. And if you fail to understand, you might end up paying the wrong tax value, which can lead to penalties or sometimes even worse.

One such tax that you need to understand is the Dividend Distribution Tax, or the DDT, in India. As the name suggests, this is the tax applied to the dividends that are paid to the shareholders. This is applied before the distribution. But is that it?

Well, there is more to this tax, which led to the abolition of the same. So, if you are an investor, planning to invest and earn good returns, read this to know the details of the DDT. So, let us get started with all the details here.

What is Dividend Distribution Tax?

Dividend Distribution Tax is also known as the DDT. It was a tax imposed on companies and mutual funds. This was the tax that was applied to the distributed dividends to shareholders or unit holders. It was paid by the company before dividends were handed over to investors. 

This tax led to double taxation. The income was taxed at the level of the company and at the individual level as well. 

Key Features of Dividend Distribution Tax

• Paid by the company declaring the dividend, not the shareholder.

• Levied under Section 115-O of the Income Tax Act, 1961.

• Applied to dividends declared, distributed, or paid by domestic companies.

• The tax rate included basic tax, surcharge, and cess components.

• DDT liability arose even if the dividend was paid in cash or credited to a banking account.

• Investors received dividends after deduction of this tax.

Dividend Distribution Tax Rate in India

The Dividend Distribution Tax (DDT) was charged at a base rate of 15%. This was calculated on the total amount of dividends declared by domestic companies. Then there are a few additions made to the rate, which include the surcharge of 12% and the health and education cess of 4%. This makes the effective tax rate come to approximately 20.56%.

For mutual funds, the rate differed depending on the mutual fund type. Equity-oriented mutual funds were taxed at 10%, while debt-oriented mutual funds faced a higher rate of 25% for individuals and 30% for firms. Companies were required to pay this tax within 14 days of declaring or distributing dividends to shareholders.

Abolition of Dividend Distribution Tax in India

The Dividend Distribution Tax was abolished in the Union Budget 2020. The government decided to remove DDT due to the following main reasons:

• To make the tax system more investor-friendly.

• To help align it with global standards. 

After abolition, the tax burden shifted from companies to investors. This means, now the shareholders are responsible for paying the tax on the dividends that they receive. This becomes part of their income. This is where the tax will now be calculated based on their income tax slab.

This was a major change in the taxation system. This helped to remove the problem of double taxation. This also boosted the foreign investment in Indian companies. You must wonder why? Well, due to this, the non-resident investors could claim relief under Double Taxation Avoidance Agreements (DTAAs). Hence, the investments increased over time. 

Current Tax Rules on Dividend Income

The abolition of the Dividend Distribution Tax was a great decision. This shifted the taxation of dividends entirely to investors. From the financial year 2020–21 onwards, dividend income is taxable in the hands of shareholders. This taxation is now under the head “Income from Other Sources.”

Companies now deduct Tax Deducted at Source (TDS) at 10%. This is applicable when the dividend payments exceed Rs. 5,000 in a financial year per shareholder. Investors must include the dividend amount in their total income. Then the tax needs to be calculated as per the income slab, which is beneficial.

Also, the NRIs can invest, and the dividends are taxed at 20% as per the Double Taxation Avoidance Agreement (DTAA). This ensures fair treatment and avoids double taxation across jurisdictions.

Conclusion

The removal of the Dividend Distribution Tax (DDT) marked a significant shift in India’s taxation system. This moved the responsibility of a company to pay the taxes to the investor. Also, this removed the problem of double taxation as well. This helped in aligning the tax benefits and ensured that increased investments could flow in. 

Hence, understanding the taxation system is very important when you are planning to invest in the market. This will help you save more and invest in the right manner. And if you are looking to start your journey, select a platform that understands your needs. This is where you can connect with Rupeezy. 

So, compare the options, plan your investments, and taxes to have a smooth wealth-building experience.

FAQs

1. Is Dividend Distribution Tax abolished in India?

Yes, DDT was abolished in the Union Budget 2020. Since April 1, 2020, dividends are not taxed under the DDT. But now, the taxation is based on the income slab of the investor.

2. Who pays tax on dividends after the abolition of DDT?

With the abolition of the DDT, the investors are now required ti pay the taxes. Companies now deduct TDS on dividend payments.

3. What is the TDS rate on dividend income?

The current TDS rate is 10% if the total dividend exceeds Rs. 5,000 in a financial year from a particular company. For non-resident investors, the TDS rate is 20%.

4. Why was the Dividend Distribution Tax removed?

DDT was removed to prevent double taxation. This helped to align the taxation system and also invited more investments, even from NRIs.

5. How are dividends from mutual funds taxed now?

Dividends from mutual funds are now added to the investor’s income and taxed as per their applicable slab rate. The fund house deducts TDS before distributing the dividend amount.