01 February 2020

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Budget 2020 Explained Dividend and Dividend Distribution Tax DDT Abolished

Budget 2020 Explained Dividend and Dividend Distribution Tax DDT Abolished
Saturday, February 1, 2020

Budget 2020 presented by the Finance Minister Nirmala Sitharaman on February 1, 2020 abolished Dividend Distribution Tax [DDT]

What is Dividend?

A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property. A company’s net profits can be allocated to shareholders via a dividend.

When company fails to make profits, then companies do not pay dividends

The dividend is normally paid in two parts, an interim and a final dividend.

To receive a dividend a shareholder must own the stock before the ex-dividend date.
The dividend gets paid to the investor on the payment date set by each individual company, these dates can be found on a company’s official website

In general, there are 4 important dividend dates that every investor should know.
They are –

1-Dividend Declaration Date - This is the date on which the company declares the dividends for the stockholders.

2-Record Date - On the dividend declaration day, the company also announces the record date. The record date is the date on which your name should be present on the company’s list of shareholders i.e. record book, to get the dividend. Shareholders who are not registered as of this date on the company’s record book will not receive the dividend. According to the company, you are only eligible to get the dividends, if your name is on their book till this record date.

3-Ex-Dividend Date - The Ex-dividend date is usually two days before the record date. In order to be able to get the dividend, you will have to purchase the stock before the ex-dividend date. If you buy the stock on or after the Ex-dividend date, then you won’t get the dividend, instead, the previous seller will get the dividend.

After the company sets the date of record, the ex-dividend date is set by the stock exchange. So, the two days before the record date is generally used by the stock exchange to give the name of the shareholders to the company.

The investors who buy the stock on or after the ex-dividend date won’t be listed in the record book of the company. So, if you purchase a stock on or after the ex-dividend date, you won’t receive a dividend until it is declared for the next time period.

4-Payment Date - This is the date set the by the company, on which the dividends deposited are paid to the stockholders. Only those stockholders who bought the stock before the Ex-dividend date are entitled to get the dividend.

What is a Dividend Distribution Tax?
The provision of Dividend Distribution Tax (DDT) was introduced in by the finance bill 1997. Only the domestic companies are liable to pay this tax. The provisions relating to DDT are governed by Section 115O of Income tax laws in India. The listed companies have to pay the tax of 15%. However, after adding all the surcharges and all the cesses the effective tax rate of DDT is 20%.

The DDT is levied on the company, along with additional dividend tax levied on the shareholder who receives over Rs 10 lakh as dividend.

In simple language When a company earns profits and decides to distribute it to its shareholders in the form of dividends, they need to pay DDT on the amount of distribution.

companies are required to pay dividend distribution tax (DDT) on the dividend paid to its shareholders at the rate of 15 per cent plus applicable surcharge and cess, in addition to the tax payable by the company on its profits.

Dividend distribution tax is also applicable on mutual funds. The fund house deducts DDT at source so dividends from mutual fund schemes are tax-free in the hands of the investors. Dividend paid by the scheme reduces the distributable surplus available for investors.

Budget 2018 introduced dividend distribution tax on equity oriented mutual funds. It is taxed at 10% and including 12% surcharge and 4% cess

On debt oriented mutual funds, DDT is 25% and after including 12% surcharge and 4% cess

Budget 2020 – 
The BJP government proposed to remove dividend distribution tax on companies, and henceforth the tax will be shifted to recipients at the applicable rate.

The dividend will now be taxed in the hands of the investor

Finance Minister Nirmala Sitharaman while unveiling the Union Budget said the proposal would make India more attractive market for investment.

"This is another bold move, which will further make India an attractive destination for investment," she said, adding it would result in a revenue sacrifice of Rs 25,000 crore per annum.

"In order to increase the attractiveness of the Indian equity market and to provide relief to a large class of investors, I propose to remove the DDT and adopt the classical system of dividend taxation under which the companies would not be required to pay DDT.

"The dividend shall be taxed only in the hands of the recipients at their applicable rate," she said.

The system of levying DDT, she said, results in increased tax burden for investors and especially those who are liable to pay tax less than the rate of DDT, if the dividend is included in their income.

The abolishing of Dividend Distribution Tax in the hands of the company and substituting it with tax in the hands of the shareholders this will encourage foreign investment since the foreign investors would get credit for the tax paid in their home countries

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