What is dividend distribution tax?

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What is dividend distribution tax?
Finance Minister has hit the bull's eye, yet again. A time when the entire investor community was getting attracted towards the glorious returns from debt funds, FM has put the breaks on it by increasing the Dividend Distribution Tax (DDT) on all non-equity funds. Let's discuss dividend distribution tax, along with the nuances of new tax rate on investors.

What is Dividend Distribution Tax?
Section 10(34) of the Income Tax Act, 1961 declares that in addition to the income tax paid by a domestic company against the total income for any assessment year, any amount declared, distributed or paid by such company in form of dividends, is subject to additional tax known as Dividend Distribution Tax. DDT is also applicable to debt mutual funds and is the tax that debt funds pay on the dividend distributed to retail investors.
Who needs to pay?
As the companies or mutual funds pay the dividend distribution tax, dividend income is tax-free in the hands of the investor. Before actual payment, companies and debt funds deduct DDT from the declared dividend and rest is distributed to the investor. Hence, common investor doesn't have any tax liability on the dividend income, but the dividend income is actually not tax free.
Why Investor should be concerned?

It's an old and controversial tax, but the renewed concern is because of recent ruling by the finance ministry to increase dividend distribution tax. Now, the tax rate on debt fund investments for retail investors is 25%, which was 12.5% earlier. This tax increase is going to impact all debt funds, gold exchange traded funds, and global funds since the post tax returns from these will be lesser now. Liquid funds are already taxed at 25% hence there is no change for them.

About the Author:
The author Bimlesh Singh is a financial advisor. He holds a Bachelor's degree from IIT and is a CFA Level 2 candidate. He can be reached at expert@investmentyogi.com


Story first published: Thursday, June 13, 2013, 8:56 [IST]
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