What Is dividend distribution tax and what has changed with DDT in budget 2020

• DDT is the tax payable by companies which give dividends to its shareholders. The existing taxation laws in India do not levy taxes to the investors on the income made through dividends.
  
  
• Budget 2020 abolishes DDT and passes on the tax burden to the investors by treating the income through dividends on par with other regular income.
  
  
• What has changed now with DDT and how it impacts taxpayers – here we discuss in this article.

Dividend refers to the returns a company gives to its shareholders on the profits it earned in a given fiscal year. Income Tax laws in India had earlier exempted the investors from having to pay taxes on the income they made from dividends received from Indian companies.

On the other hand, the companies had to pay Dividend Distribution Tax (DDT). This kind of taxation procedure is akin to TDS (Tax Deduction at Source) operating in many other taxing formats. Budget 2020 has brought in a change in how incomes through dividends will be taxed henceforth in India.

Who had to pay DDT and what was the rate of DDT?

All the provisions related to DDT are mentioned in Section 1150. Before Budget 2020, a company in India declaring dividend needs to pay DDT at the rate of 15% on the gross value of the dividends payable to the investors. The calculations would work out as 17.65% taxes on the total amount of the dividend. If the surcharges and cess are added, the resulting rate of dividend would be 20.56%.

Only when the income through dividends received by individuals and Hindu Undivided family or partnership and private trusts exceeded ₹10 lakhs, it would invite 10% tax.

What concerns were raised on DDT

Market participants like brokers have been pressing for so long to scrap the DDT. Industry experts find DDT adding up to the burden of the corporate and they argued that it made the markets less attractive. In addition to the DDT, the other tax burdens the other taxes levied on market instruments include the Securities Transaction Tax (STT) and Long-Term Capital Gains (LTCG). Earlier in the Union Budget 2018, the former Finance Minister Arun Jaitley had introduced DDT on the equities of mutual funds.

What has changed with DDT in the Union Budget 2020

Budget 2020 has abolished Dividend Distribution Tax (DDT) and the FM Nirmala Sitharaman stated that income through dividends, shares and mutual funds will henceforth be treated on par with the regular income and the taxes will be applied on such category of incomes on par with the tax slab rates applicable in the said individual’s case.

The latest budget says that all types of dividend incomes will hereafter be fully taxable. This move will increase the burden of taxable income of individuals. While this can mean a higher tax burden on the small and medium scale investors not making more than ₹10 lakhs in earnings through dividends, corporates might choose to increase dividends. Without tax, companies would have surplus funds to distribute to their shareholders.