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Sunday, January 19, 2014

What is Dividend Distribution Tax for AY 2014-15

Understanding that the Dividends paid to you are not "actually" tax free and attract hidden taxes, you can take much more informed decisions when it comes to investing for Dividend based Income. Let us understand what is Dividend Distribution Tax (DDT) and how does this understanding can help us...Read on..

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). 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 the tax? 
As the companies or Mutual Funds pay the dividend distribution tax, dividend Income is tax-free in the hands of the investor. However, there is a catch here. Before the 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 that he or she finally receives, 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 the recent ruling by the finance ministry this year 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.

What made the govt to raise DDT ?
Earlier the interest earned by company fixed deposits was clubbed to income of the individual and taxed at marginal rate of tax, which is 20.6% (for investors in 20% tax bracket) and 30.9% (for investors in 30% tax bracket) and the dividends on the debt funds (other than liquid funds) were taxed at 13.5%. This made individuals in 20% and 30% with income needs consider investments in dividend option of debt funds. However in the budget for FY2013-2014 finance minister has hiked the DDT and also increased the surcharge. That results in an effective rate of tax of 28.33% on dividends declared by all debt funds. This new tax rule is effective from June 1, 2013.

So, make sure that your calculation of your actual Returns on Investments in Debt mutual funds before taking in the plunge.


Manoj Arora
Freedom can buy you what money cannot !!

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