Dividend distribution tax (sec115-O and 115R)-new calculation

If you have invested in the shares of company, you may be aware of dividend distribution tax.

What is dividend distribution tax?

When domestic company distributes profit by way of dividend, the company has to pay additional tax via dividend distribution tax. This provision is applicable to mutual fund companies too. Company is not paying dividend from own income but deducting it from dividend and distributing remaining amount to shareholders.

Necessity of DDT:

We all know that dividend is income and it is taxable. Instead of collecting tax on dividend from each person, the government has introduced section 115O. As per section 115O, company deducts tax from dividend income while distributing dividend income and pays remaining amount to shareholders.

DDT vs TDS:

DDT is not tax deducted at source but it is like advance tax which shareholders deposit through company.

Does dividend income tax again in the hands of shareholder?

No, dividend received by shareholders is exempt as it is already taxed before distribution.

Rate of dividend distribution tax:

For domestic company:15% (effective rate is 16.995% including surcharge and education cess)

Note: new rate 19.994% from 1st october, 2014.

Mutual fund to individual and HUF: 28.325% (effective rate)

The rates are effective rates for distribution of dividend. It will be calculated on dividend paid amount.

Calculation of dividend distribution tax:

Before 1/10/14:

Distribution of surplus: Rs. 1,00,000

Calculation of DDT: 1,00,000/116.995*16.995=14526

Distributable dividend: 85474

After 1/10/14:

There is amendments in calculation of DDT as per financial act, 2014.

With effects from 1/10/14, dividend distribution tax will be calculated as per following methods.

Option 1:

Suppose distributable surplus is Rs. 100000

DDT will be calculated on 16.995% on distributable income. So dividend distributable tax will be 16995.

Distributable dividend will be 83005(100000-16995).

Option 2:

Distributable surplus is Rs. 1,00,000.

Calculate DDT on distributable dividend at 19.994% . Here it is 16670 (1,00,000*19.994/119.994)

Distributable dividend will be 83330 (1,00,000-16670)

Effects of this change:

Due to change in method for calculation of dividend distribution tax, effective tax rate has increment of 3%. So investor will receive lower dividend income on investment in shares.

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