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

2025-12-23

1096 Views

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 free of taxes.

Dividend Distribution Tax (DDT)was a form of taxation that companies used to pay while declaring and distributing dividends. But not anymore. Now the Indian Government wants its citizens to pay up for their dividend income by themselves.

During the Union Budget 2020, our Finance Minister announced the end of DDT with effect from 1st April 2020. Now taxpayers are liable to pay taxes on their dividend income. 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.

  • Claim up to 20% interest deduction 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 lakh LTCG exemption) offers tax-efficient returns, boosting long-term wealth.

  • Paying advance tax on dividend income above ₹10,000 helps avoid penalties and ensures smooth tax compliance.

What is Dividend Distribution Tax (DDT)?

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. 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. Introduced on 1st April 2003, it was described in Chapter XII-D under the heading of ‘Special Provisions Relating to Tax on Distributed Profits of Domestic Companies.

DDT had to be paid within 2 weeks of announcement or distribution of dividends. If not paid within 14 days of declaration or credit, whichever is early, the company had 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 Rs. 2 lakhs dividend that was declared:

  • Determine the grossed-up dividend in step one. This is calculated at 17.65% on Rs. 2 lakhs. Adding the amount to Rs. 2 lakhs results in Rs. 235,300.
  • Compute the Dividend Distribution Tax (DDT) on the Grossed Up Dividend at 15%, which comes to Rs 35,295. As a result, the DDT on Rs 2 lakhs will be Rs 35,295.

Key Pointers to Note about DDT

Under the Wealth Tax Act, 1957, the following persons are liable to pay dividend distribution tax:

  1. A company that has declared, distributed or paid any dividend on or after the 1st day of April 1957.
  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 after the 1st day of October 2002.

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

  • Despite the existence of DDT, if one beneficiary’s total dividend income was more than ₹10 lakhs, he had to pay 10% of it in taxes
  • DDT didn’t carry any deduction or tax credit for the company’s income tax liability. It was over and above of 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 is paid on behalf of the New Pension Scheme (NPS), no DDT applies to it
  • DDT rate for debt mutual funds was 25%, while for equity-focused MF, it was 10%, as introduced in Budget 2018
  • Dividend Distribution Tax is levied at the rate of 15% on dividends distributed by a domestic company and mutual fund
  • The tax is payable by the company or mutual fund and is not borne by the shareholders

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

  • By foreign companies
  • To shareholders who are not residents of India
  • To shareholders who are resident in India but not liable to tax in India
  • Distributed by a company to its shareholders who are taxable in India but are not resident in India
  • To shareholders who are not taxable in India and are not resident in India.

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New Provisions of Dividend Taxation

The Finance Act, 2020, introduced in Budget 2020, shifted the dividend tax payment liability from businesses to individual investors. Now your dividend income will be taxed at your income tax slab rate. That means if you fall in the 30% bracket, your dividend income will 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 during IT return filing. 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.

Key Pointers to Note About the New Dividend Tax

  • For non-resident Indians, TDS for dividends of domestic companies will be deducted at 20% 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 that are taxed outside of 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

Everything, to be precise. With the abolition of DDT, the tax payment liability is now in the hands of shareholders, which was earlier in the hands of 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 the DDT liability of mutual funds is also withdrawn with the introduction of the Finance Act, 2020. Even the 10% tax on dividend receipts over 10 lakhs (under Section 115BBDA) for individuals, HUFs and Firms also stands cancelled.

Old or New - Which One is Better for Investors?

It depends on which tax slab you fall into. Like many other income tax norms, 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). you are now left with around ₹3,350. This is less than ₹3,972, which you would have got according to the old taxation rules.

As you can see, people in the exemption and 10% bracket will be benefited from the new rules of dividend taxation, while people in the highest tax bracket have to pay more than their previous tax liability.

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 avoid paying taxes on the dividends or other income from the stocks:

ULIPs for Tax-Free Income and Growth

The ULIP is a combination of insurance and investment. This plan is a great option for those who wish to invest in the stock markets and want life insurance protection.

  • It is best suited for long-term investment goals like retirement, a child’s higher education, etc. ULIPs offer various benefits to policyholders.
  • A ULIP plan allows the investor to avail of the tax benefit on the premium paid up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, 1961.
  • 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 ₹5 lakh (as per the amendment applicable from FY 2023–24 for traditional policies and FY 2021–22 for ULIPs), and continuing in FY 2025–26 for AY 2026–27.
  • The investor can avail of the benefit of a life insurance cover with the ULIP plan.
  • The ULIP plan offers the facility of partial withdrawal after five policy years.

ULIPs offer multiple fund choices for you to select from and you can invest in a blue-chip equity fund to gain dividend income. Your partial withdrawals after five years are completely tax-free. So, no tax is to be paid on the income of the equity fund.

Equity Mutual Funds

Whether equity mutual funds gain value through dividends or selling stocks, Tax Laws will treat your portfolio gain as a capital gain. Long-term capital gain of up to Rs 1 lakh is exempt from tax every year. However, long-term capital gains (LTCG) up to ₹1 lakh per year (on holdings above 12 months) are still exempt from tax under Section 112A.

Thus, you can invest in mutual funds investing in blue chip or dividend-paying stocks and enjoy a tax-free withdrawal of capital gains up to Rs 1 lakh every year.

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 which 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 dividend distribution tax smoothly and claim eligible deductions.

  1. Collect Your Dividend Details & Check TDS: Gather your dividend statements from brokers or companies. Check if companies have deducted TDS at 10% (or 20% if PAN is missing). Verify these deductions in Form 26AS or Form 16A.
  2. Choose the Right ITR Form & Fill Schedule OS: Select ITR-1 if you earn through salary, house property, and dividends (not exceeding ₹50 lakh and no capital gains). Use ITR-2 if you have capital gains or multiple income sources. Report your dividend income in Schedule OS (Income from Other Sources) and enter the company's TDS amount and TAN, if applicable.
  3. 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 Schedule OS.
  4. 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 (June, September, December, and March) to avoid interest penalties under Sections 234B and 234C.
  5. 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 (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 (Unit-Linked Insurance Plan): 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: It is the tax amount deducted by the employer from the taxpayer, which is deposited with the IT Department.
glossary-img

FAQs

Dividend income is taxed as per your income slab. If it exceeds ₹5,000 from a company 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.

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

Investing in ULIPs and equity mutual funds can help, as ULIP returns are tax-free under Section 10(10D), and LTCG up to ₹1 lakh is exempt.

 

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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