dividend distribution tax

Dividend Distribution Tax (DDT): Rates and Calculations

Understand Dividend Distribution Tax, including applicable rates, calculation method, and its impact on shareholders and companies.

Written by : Knowledge Centre Team

2026-02-18

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8 minutes read

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A dividend is something that puts a smile on every investor’s face. Dividend payment reflects a company’s positive cash flow and good financial health. But do you know dividends come with extra baggage? Like any other income, dividend income is not exempt from taxes.

Dividend Distribution Tax (DDT) was a form of taxation that companies used to pay while declaring and distributing dividends. However, it has been abolished, and now the Indian Government requires investors to pay tax on their dividend income themselves.

During the Union Budget 2020, the Finance Minister announced the abolition of DDT with effect from 1st April 2020. Now, taxpayers are liable to pay tax on their dividend income in their hands at their applicable income tax slab rates. Before we come to a conclusion on which method is better, let’s explain both the past and the present norms of dividend taxation.

Key Takeaways


  • Dividend income is now taxed at your income slab rate, so smart tax planning can help reduce your tax burden
  • Submitting Form 15G/15H prevents TDS deductions if your income is below the taxable limit and the tax payable is nil
  • Claim up to 20% interest deduction under section 57 and TDS credit if you have taken a loan to invest in shares
  • Investing in ULIPs (with premiums within ₹2.5 lakh/year) and equity mutual funds (up to ₹1.25 lakh LTCG exemption) offers tax-efficient returns
  • Paying advance tax if your total tax liability (after TDS) is above ₹10,000 in a financial year helps avoid penalties

What is Dividend Distribution Tax in India?

Under the previous regime, if a company declared a dividend of ₹10,000, it paid DDT of ₹1,500 (15%) before distributing the remaining amount to shareholders. (Note: In practice, surcharge and cess were also applicable, increasing the effective dividend tax rate.) Now, the entire ₹10,000 is distributed to the shareholder, who must include this amount in their income and pay tax according to their applicable slab rate.

The Dividend Distribution Tax was mandated by Section 115-O of the Income Tax Act, 1961. It was reintroduced on 1st April 2003 and was described in Chapter XII-D under the heading of ‘Special Provisions Relating to Tax on Distributed Profits of Domestic Companies.’

The DDT tax had to be paid within 2 weeks of the announcement, distribution, or payment of the dividends, whichever was earliest. If not paid within 14 days of declaration or credit, whichever is earlier, the company has to pay a penal interest of 1% each month till they pay.

Let's use an illustration to better grasp this:

This example is for historical understanding only.

Determine the DDT for the ₹2 lakhs dividend that was declared:

  • Determine the grossed-up dividend in step one. This is calculated at 17.65% on ₹2 lakhs. Adding the amount to ₹2 lakhs brings the total to ₹235,300.

  • Compute the Dividend Distribution Tax (DDT) on the Grossed Up Dividend at 15%, which comes to ₹35,295. As a result, the DDT on ₹2 lakhs will be ₹35,295. (This calculation excludes applicable surcharge and health & education cess, which increased the effective DDT rate to approximately 20.56% before its abolition.)

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Key Pointers to Note about DDT

Under the Income Tax Act, 1961, the following persons are liable to pay dividend distribution tax:

  1. A company that has declared, distributed or paid any dividend on or before 31st March 2020

  2. A mutual fund specified under Section 10(23D) of the Income-tax Act, 1961, which has declared, distributed, or paid any dividend on or before March 31, 2020.

You should note the following key points about the Dividend Distribution Tax:

  • Despite the availabilityof DDT, if one beneficiary’s total dividend income was more than ₹10 lakhs, he had to pay 10% of it in taxes (up to FY 2019-20)

  • DDT didn’t carry any deduction or tax credit for the company’s income tax liability. It was over and above the corporate tax paid by a company

  • If an Indian company received dividends from its foreign subsidiary, it was taxed at a concessional rate under Section 115 BBD

  • If the dividend was paid to the New Pension Scheme (NPS) Trust, under Section 10(44), it was exempt from DDT

  • The DDT rate for debt mutual funds was effectively higher (25% plus surcharge and cess under Section 115R), while for equity-focused Mutual Funds, it was 10%, as introduced in Budget 2018

  • Dividend Distribution Tax was levied at the base rate of 15% (plus applicable surcharge and cess) on dividends distributed by a domestic company under Section 115-O.

  • The tax is payable by the company or mutual fund and was not borne by the shareholders

Dividend Distribution Tax is not levied on the following dividend payments:

  • By foreign companies

  • On dividends declared, distributed or paid after 31st March 2020 (post abolition of DDT)

New Provisions of Dividend Taxation

The Finance Act, 2020, introduced in Budget 2020, shifted the dividend tax payment liability from businesses to individual investors. The dividend income was taxed at the income tax slab rate. That meant if one falls in the 30% bracket, theirdividend income would also be taxed at 30%, irrespective of the total amount.

As per the latest tax provisions, effective April 1, 2025, companies are required to deduct TDS at 10% on dividend payments exceeding ₹10,000 in a financial year. This deduction will be available as a tax credit when filing the IT return. You can also submit Form 15G/15H to companies for not deducting any TDS if your total annual income is lower than the tax exemption limit.

Note: If PAN is not furnished, TDS is deducted at 20% under Section 206AA.

trivia-img

Did You Know?

The Indian government is expecting record dividend receipts of over ₹3.2 lakh crore from the Reserve Bank of India and public sector banks in FY 2026-27


Source: TOI

Cut Tax Stress 46,800

Key Pointers to Note About the New Dividend Tax

With the shift of tax liability from companies to shareholders, it is important to understand the practical implications of the new dividend taxation framework.

  • For non-resident Indians, TDS for dividends of domestic companies will be deducted at the applicable rate, subject to the Double Taxation Avoidance Agreement (DTAA)

  • You could claim up to 20% of total dividend income as a deduction on dividend tax by showing interest expense if you bought the stocks by taking up a loan, under Section 57 of the Income Tax Act

  • If your total dividend tax liability is greater than ₹10,000 a year, you need to pay advance tax in quarterly instalments to avoid interest penalties

  • Dividends of foreign companies are also taxable and will be taxed according to the tax slab under the head of ‘Income from Other Sources’

  • Foreign company dividends taxed outside India will get the benefit of double taxation relief. You can claim relief u/s 91 if no DTAA exists with the country of origin

Impact of Abolition of Dividend Distribution Tax

With the abolition of DDT, the tax payment liability is now in the hands of shareholders, rather than by companies paying dividends. Now, instead of the curtailed dividend, you’ll receive the full dividend amount credited to your bank if no TDS is deducted.

All DDT liability of mutual funds is also withdrawn with the introduction of the Finance Act, 2020. Even the 10% tax on dividend receipts of 10 lakhs (under Section 115BBDA) for individuals, HUFs, and Firms also stands cancelled.

Old or New Tax Regime: Which One is Better for Investors?

It depends on which tax slab you fall into. As with many other income tax reforms, the low-income group will benefit from the new dividend taxation norms. In contrast, the high earners will be churning out more than before. Let’s explain this with a couple of examples.

  • Scenario 1: If your yearly income is ₹2,40,000 and you received a total dividend of ₹5,000, then under the old system, your effective dividend credit would have been around ₹3,972. But in the new system, you’ll receive the full ₹5,000 in your account.

  • Scenario 2: If your yearly income is ₹24,00,000 and you received a total dividend of ₹5000, then under the new system. Now, this amount is added to your income and taxed at 30% (plus applicable cess). After 4% health and education cess, the effective rate becomes 31.2%. You are now left with around ₹3,440. This is less than ₹3,972, which you would have got according to the old tax rules.

As you can see, people in the exemption and 10% bracket will benefit from the new rules of dividend taxation, while people in the highest tax bracket may pay more compared to the earlier DDT regime.

Investments for Tax-Free Dividends

If you are investing in direct equity stocks for dividend income, as per the new provisions, almost every penny is taxable. However, using the following portfolio investments, you can legally optimise or reduce  taxes on the income generated from equities (subject to conditions under the Income-tax Act, 1961):

  • ULIPs for Tax-Free Income and Growth: A ULIP is a combination of insurance and investment. This plan is a great option for those who wish to invest to acquire market-related gains along with life insurance protection. It is best suited for long-term investment goals such as retirement and a child’s higher education. ULIPs offer various benefits to policyholders:
    1. A ULIP plan allows the investor to avail of the tax benefit on the premium paid up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961
    2. The returns on the investment are completely tax-free under Section 10(10D) of the Income Tax Act, 1961, provided the annual premium does not exceed ₹2.5 lakh for ULIPs issued on or after 1 February 2021 
    3. If the premium exceeds ₹2.5 lakh, the maturity proceeds (except on death) are taxable as capital gains
    4. The investor can benefit from life insurance cover with the ULIP plan
    5. The ULIP plan offers the facility of partial withdrawal after five policy years

ULIPs offer multiple fund choices ranging from equity, debt, and balanced funds, allowing investors to align their portfolio with their risk appetite and financial goals. Your partial withdrawals after five years are completely tax-free, provided the policy continues to qualify under Section 10(10D). 

  • Equity Mutual Funds: Whether equity mutual funds gain value through dividends or selling stocks, dividend income from mutual funds is taxable in the hands of the investor at slab rates. Meanwhile, gains from selling units are treated as a capital gain.

    Long-term capital gains of up to ₹1 lakh were earlier exempt from tax every year. However, under the amended provisions (effective FY 2024-25 onwards), long-term capital gains (LTCG) on equity-oriented mutual funds exceeding ₹1.25 lakh in a financial year are taxed at 12.5%, provided the holding period exceeds 12 months.

    Thus, you can invest in equity-oriented mutual funds and enjoy a tax-free withdrawal of long-term capital gains up to ₹1.25 lakh per financial year (subject to prevailing tax laws).

    Diversification is one of the basic principles of investment safety. Applying it to your income-generating investments will help you build a stable income. Dividends are also a mode of passive income that works for you even while you sleep.

How to File Taxes on Dividends?

Filing taxes on dividend income is essential to stay compliant with tax laws and avoid penalties. Follow these five simple steps to file your tax return for dividend income smoothly and claim eligible deductions.

  • Collect Your Dividend Details & Check TDS: Gather your dividend statements from your broker or the companies. Check if companies have deducted TDS at 10% (or 20% if PAN is missing). Verify these deductions in Form 26AS or the Annual Information Statement (AIS) Form 16A.
  • Choose the Right ITR Form & Fill Schedule OS: Select ITR-1 if you earn through salary, house property, and dividends (not exceeding ₹50 lakh, no capital gains, and other prescribed conditions satisfied). Use ITR-2 if you have capital gains or multiple sources of income. Report your dividend income in Schedule OS (Income from Other Sources) and enter the company's TDS amount and TAN, if applicable.
  • Claim TDS Credit & Interest Deduction: Claim TDS credit on your dividends to lower your tax liability. If you took a loan to invest in shares, claim an interest deduction of up to 20% of your dividend income under Section 57 (reported under Schedule OS).
  • Calculate Your Tax Liability & Pay Advance Tax (If Applicable): Add your dividend income to your total earnings and calculate tax based on your income slab. If your total tax liability exceeds ₹10,000, pay advance tax in instalments (on or before 15th June, 15th September, 15th December, and 15th March) to avoid interest penalties under Sections 234B and 234C.
  • E-File Your ITR Before the Deadline: File your ITR online through the Income Tax Department’s portal or a trusted tax-filing service. Submit your return before the deadline (generally 31st July of the assessment year for individuals not subject to audit, unless extended). After filing, verify your return via Aadhaar OTP or net banking.

Conclusion

With the removal of the Dividend Distribution Tax (DDT), investors now bear the tax liability on their dividend income. While this benefits lower-income individuals, high earners may face higher taxes on dividends. However, strategic investments in ULIPs (within ₹2.5 lakh annual premium cap) and equity mutual funds can help minimise tax burdens while ensuring long-term financial growth. By leveraging tax-free investment options and optimising tax filing, investors can maximise their earnings and create a stable passive income stream.

Glossary

  1. ULIP: A tax-saving investment combining insurance and market returns
  2. Income from Other Sources: Earnings that are not covered in the main income heads- salary, house property, and capital gains
  3. Mutual Funds: A mutual fund is an investment option that pools money from multiple investors
  4. Advance Tax: The amount of income tax that is paid in advance, rather than a lump-sum payment at the year-end
  5. TDS: The tax amount deducted by the employer from the taxpayer, which is deposited with the IT Department
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FAQs

Dividend income is taxed as per your income slab. If a company’s total income exceeds ₹10,000 in a year, 10% TDS is deducted (20% without PAN). You can claim TDS credit and up to 20% interest deduction under Section 57.

Earlier, companies paid DDT before distributing dividends. Now, investors must pay tax on dividend income based on their tax slab.

Yes, if you took a loan to buy dividend-paying stocks, you can claim an interest deduction of up to 20% of your dividend income under Section 57 of the Income-tax Act, 1961 (no other expenses are allowed as a deduction)

Yes, dividends from both equity and debt mutual funds are taxable in the hands of investors as per their income tax slabs.

Investing in ULIPs and equity mutual funds can help, as ULIP returns are tax-free under Section 10(10D), subject to the ₹2.5 lakh annual premium limit for policies issued on or after 1 February 2021, and LTCG up to ₹1. 25 lakh (on equity-oriented funds, subject to prevailing tax laws) is exempt.

Dividends from Indian companies are taxable in the hands of shareholders at their applicable income tax slab rates, since the Dividend Distribution Tax (DDT) was abolished with effect from April 1, 2020. Companies are required to deduct 10% Tax Deducted at Source (TDS) if the total dividend paid to a resident shareholder exceeds ₹10,000 in a financial year (20% if PAN is not furnished).

Dividend income is taxable in India in the hands of shareholders at their applicable income tax slab rates and is reported under the head “Income from Other Sources.” For resident individuals, TDS at 10% is deducted if total dividends exceed ₹10,000 in a financial year (20% if PAN is not furnished). For non-residents, TDS is deducted under Section 195 at the applicable “rates in force,” which may generally be 20% plus applicable surcharge and cess, subject to relief under the relevant Double Taxation Avoidance Agreement (DTAA).

Yes, in India, dividend income is taxed in the hands of the recipient, and the applicable tax treatment depends on the nature and status of the investor. Since April 1, 2020, dividends are taxable in the hands of shareholders. Individuals are taxed at their applicable income tax slab rates, while companies receiving dividends are taxed at the applicable corporate tax rates, subject to relevant provisions under the Income-tax Act, 1961.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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