Warning: Do not believe in advertisements proclaiming tax-free dividends.
Reason: Dividend income is NOT EXEMPT from tax.
Of course, you don't have to pay any tax AFTER the dividend reaches your pocket This creates a wrong impression among many people, that dividend income is not taxable.
What is often overlooked is the fact that, even BEFORE the dividend is received, it has been taxed.
[Disclaimer: This applies for investors whose dividend income is Rs.10 lakhs or less. People earning dividend income in excess of Rs.10 lakhs have to pay "additional tax" EVEN AFTER they receive the dividends. See Note Below.]
The tax on dividend is supposed to be deducted by the dividend-payer at the time of distribution of dividend (just like your employer deducts TDS from your salary income, or the banker from your interest income). Hence, it is known as Dividend Distribution Tax or DDT.
This Dividend Distribution Tax is different for different products. So let's explore each of these separately.
Important : The DDT is to be calculated not on the actual dividend "paid", but on the amount "after grossing up dividend paid" by the rate of tax (excluding Surcharge and Cess) on such dividend.
Accordingly, calculation of the DDT is as under:
Dividend Paid = Rs.85
Gross Amount = 85/(1-0.15) = Rs.100
Dividend Distribution Tax = 15% * 100 = Rs.15
Add: 12% as Surcharge = 12% * 15 = Rs.1.80
Add: 3% as Education Cess = 3% * (15 + 1.80) = 3% * 16.80 = Rs.0.50
Total Dividend Distribution Tax = 15 + 1.80 + 0.50 = Rs.17.30
Thus, on every Rs.85 you receive as dividend on equity shares, Rs.17.30 has been deducted by the company as Dividend Distribution Tax.
Yes, you read it right... equity-based mutual funds are exempt from deduction of DDT.
Wait:
Before you start rejoicing, here's the reason why dividend payable on equity mutual funds has been kept outside the purview of dividend distribution tax.
Mutual fund schemes are merely a pass-through investment vehicle. They have already been subjected to DDT when receiving dividends from the companies in their scheme portfolio. Levying DDT on them would tantamount to double taxation of the same income.
In others words, the dividend has already been taxed when flowing from company to the mutual fund. So it is NOT TAXED again when flowing from mutual fund to the unit-holder.
And, just like equity shares, the DDT is to be calculated not on the actual dividend "paid", but on the amount "after grossing up dividend paid" by the rate of tax (excluding Surcharge and Cess) on such dividend.
Accordingly, calculation of the DDT is as under:
Dividend Paid = Rs.75
Gross Amount = 75/(1-0.25) = Rs.100
Dividend Distribution Tax = 25% * 100 = Rs.25
Add: 12% as Surcharge = 12% * 25 = Rs.3
Add: 3% as Education Cess = 3% * (25 + 3) = 3% * 28 = Rs.0.84
Total Dividend Distribution Tax = 25 + 3 + 0.84 = Rs.28.84
Thus, on every Rs.75 you receive as dividend on debt and other non equity-based funds, Rs.28.84 has been deducted by the AMC as Dividend Distribution Tax.
Concluding, be aware of the tax payable on dividend. This will save you lots on taxes — especially in case of mutual funds — where you can AVOID Dividend Option and instead take your returns in the form of CAPITAL GAINS under the Growth Option.
NOTE: For people with dividend income more than Rs.10 lakhs
Govt. feels that people with high dividend income are unduly advantaged. Those who receive income as dividend, pay only 15% tax. Whereas those receiving income in other forms, say salary, are taxed at 30%. This is particularly true in case of Promoters and High Net Worth Individuals, whose dividend income often runs into crores of rupees.
To remove this INEQUITY...
... Those earning dividend income in excess of Rs.10 lakhs, have to pay extra tax @10%, on the dividend amount exceeding Rs.10 lakhs
... This is, in addition, to the Dividend Distribution Tax @15% deducted by the companies on the dividend paid.
Reason: Dividend income is NOT EXEMPT from tax.
Of course, you don't have to pay any tax AFTER the dividend reaches your pocket This creates a wrong impression among many people, that dividend income is not taxable.
What is often overlooked is the fact that, even BEFORE the dividend is received, it has been taxed.
[Disclaimer: This applies for investors whose dividend income is Rs.10 lakhs or less. People earning dividend income in excess of Rs.10 lakhs have to pay "additional tax" EVEN AFTER they receive the dividends. See Note Below.]
The tax on dividend is supposed to be deducted by the dividend-payer at the time of distribution of dividend (just like your employer deducts TDS from your salary income, or the banker from your interest income). Hence, it is known as Dividend Distribution Tax or DDT.
This Dividend Distribution Tax is different for different products. So let's explore each of these separately.
A. Dividend Distribution Tax on Equity Shares
As per Income Tax Laws, DDT on the dividend distributed by the companies on its equity shares is 15% + Surcharge + Education Cess.Important : The DDT is to be calculated not on the actual dividend "paid", but on the amount "after grossing up dividend paid" by the rate of tax (excluding Surcharge and Cess) on such dividend.
Accordingly, calculation of the DDT is as under:
Dividend Paid = Rs.85
Gross Amount = 85/(1-0.15) = Rs.100
Dividend Distribution Tax = 15% * 100 = Rs.15
Add: 12% as Surcharge = 12% * 15 = Rs.1.80
Add: 3% as Education Cess = 3% * (15 + 1.80) = 3% * 16.80 = Rs.0.50
Total Dividend Distribution Tax = 15 + 1.80 + 0.50 = Rs.17.30
Thus, on every Rs.85 you receive as dividend on equity shares, Rs.17.30 has been deducted by the company as Dividend Distribution Tax.
B. Dividend Distribution Tax on Equity / Balanced Mutual Funds
There is no DDT on the dividend distributed on the equity-oriented mutual funds.Yes, you read it right... equity-based mutual funds are exempt from deduction of DDT.
Wait:
Before you start rejoicing, here's the reason why dividend payable on equity mutual funds has been kept outside the purview of dividend distribution tax.
Mutual fund schemes are merely a pass-through investment vehicle. They have already been subjected to DDT when receiving dividends from the companies in their scheme portfolio. Levying DDT on them would tantamount to double taxation of the same income.
In others words, the dividend has already been taxed when flowing from company to the mutual fund. So it is NOT TAXED again when flowing from mutual fund to the unit-holder.
C. Dividend Distribution Tax on Debt / Gold / International / MIP Mutual Funds
As per Income Tax Laws, DDT on the dividend distributed by the Asset Management Companies on non equity-oriented mutual funds — such as debt funds, gold funds, international or global funds, MIP schemes, etc. — is 25% + Surcharge + Education Cess.And, just like equity shares, the DDT is to be calculated not on the actual dividend "paid", but on the amount "after grossing up dividend paid" by the rate of tax (excluding Surcharge and Cess) on such dividend.
Accordingly, calculation of the DDT is as under:
Dividend Paid = Rs.75
Gross Amount = 75/(1-0.25) = Rs.100
Dividend Distribution Tax = 25% * 100 = Rs.25
Add: 12% as Surcharge = 12% * 25 = Rs.3
Add: 3% as Education Cess = 3% * (25 + 3) = 3% * 28 = Rs.0.84
Total Dividend Distribution Tax = 25 + 3 + 0.84 = Rs.28.84
Thus, on every Rs.75 you receive as dividend on debt and other non equity-based funds, Rs.28.84 has been deducted by the AMC as Dividend Distribution Tax.
Concluding, be aware of the tax payable on dividend. This will save you lots on taxes — especially in case of mutual funds — where you can AVOID Dividend Option and instead take your returns in the form of CAPITAL GAINS under the Growth Option.
NOTE: For people with dividend income more than Rs.10 lakhs
Govt. feels that people with high dividend income are unduly advantaged. Those who receive income as dividend, pay only 15% tax. Whereas those receiving income in other forms, say salary, are taxed at 30%. This is particularly true in case of Promoters and High Net Worth Individuals, whose dividend income often runs into crores of rupees.
To remove this INEQUITY...
... Those earning dividend income in excess of Rs.10 lakhs, have to pay extra tax @10%, on the dividend amount exceeding Rs.10 lakhs
... This is, in addition, to the Dividend Distribution Tax @15% deducted by the companies on the dividend paid.
