Fictionary - Dividend Distribution Tax

The dividend distribution tax, introduced in 1997 was a new method of taxing dividends before their payment. Before the introduction of the first budget of Modi 2.0, there were rumours that this two decades old policy would be entirely scrapped. Interestingly enough, the taxation policy was abolished. But before that, we should understand what this tax meant and how would dividends be taxed from now on.

BY HARSHIT GUPTA | 2 Mins Read 

What It Is?

The Dividend Distribution Tax is a tax levied on dividends that a company pays to its shareholders out of its profits. The Dividend Distribution Tax, or DDT, is taxable at source, and is deducted at the time of the company distributing dividends. The dividend is the part of profits that the company shares with its shareholders. The law provides for the Dividend Distribution Tax to be levied at the hands of the company, and not at the hands of the receiving shareholder. Earlier, the effective DDT was 16.995 per cent on the dividend declared by companies to shareholders. The tax was then increased in Budget 2014 and the current effective DDT rate was 20.56 per cent.

The company has to deposit Dividend Distribution Tax within 14 days of declaration, distribution or payment of dividend whichever is earlier. In case of non-payment within 14 days, the company shall have to pay interest at the rate of 1% of the DDT. Also, if an individual investor earns a dividend of more than ₹10 lakhs, an additional tax of 10% will be levied on such dividend income.

The New Rule and the Effect

In the new Budget 2020, it was announced that the Dividend Distribution Tax is now abolished. As per the new budget, now the receipents of the dividend would be entitled to pay income tax at existing slabs without consideration of the dividend amount received. Now, how would this affect the shareholders. The small and medium shareholders, earning less than ₹10 lakhs of dividend would be benefited as the net receipts after paying tax would increase for them. On the other hand, taxpayers in the 30 percent bracket would be negatively impacted as they would have to pay higher taxes.