What is dividend distribution tax?

June 13, 2013

Investments

Finance Minister has increased the Dividend Distribution Tax (DDT). The dividend distribution tax is at 12.5% for the debt funds earlier, now it has been increased to the 25%. It is is steep increase in the tax and would hurt the retail investors to attract more investments towards the debt funds. DDT is not applicable for the equity funds. Dividend Distribution Tax (DDT) on all non-equity funds. This article provides basic insights on DDT and how it will affect the retails investors.

What is dividend distribution tax?

If you are a retail investor who invests regularly on the debt funds, the accumulated profit from the companies would be distributed by the company to all the investors on that company. Note that company’s profit is arrived at after paying the income tax for the total income. DDT is not fall under the income tax category. It is a special tax levied on the distribution of the profit to the investors. It is a controversial tax burden on the investors pocket. The reason is that, company has already paid the tax for its profit, but it becomes another tax payment for the distribution to the investors.

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In the recent announcement, Finance Minister has announced that  there will be 25% tax deducted on the dividends. Note that investors are not asked to pay the tax on its dividend income. It is tax free on their hand. Infact it is not a tax free income, the actual tax is paid by the company itself before transferring the dividend.  This change would impact the total dividend distributed to to the investors.

Hope this article helps you to understand the dividend distribution tax and how it impacts retail investors.

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