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Tax on dividend

Tax on dividend

Reason for Zero Tax on Dividends

Earlier, tax on dividends was liable to be paid as per the Income Tax Slab Rates. However, there were very few taxpayers who used to genuinely disclose the dividends received and pay taxes thereon.

Therefore so as to ensure proper collection of taxes on dividends, the govt has changed the manner of charging tax on dividends. They have now made dividends received from any domestic company as tax free in the hands of the investors.

However to compensate the loss that would be arising from making such dividends as tax free, they have enforced an extra tax on the companies at the time of announcing dividends. As per Section 115-O, at the time of payment of dividend, they have to pay a dividend distribution tax from the profits of the company.

Although the Indian Govt has exempted the dividends from the levy of tax in the hands of the taxpayers, they have indirectly collected the tax on dividends from the companies by enforcing Dividend Distribution Tax. This can be explained with the help of an example:-

For example, a company intends to declare a dividend of Rs. 100 to its shareholders and the rate of Dividend Distribution Tax is 15%. Now, the company will first have to pay 15% of Rs. 100 i.e. Rs. 10 as Dividend Distribution Tax to the Govt. As the company has been made to pay Rs. 15 to the govt for declaring the dividend, effectively it is left with only Rs. 85 to pay as dividends to the shareholders.

Thus, with the introduction of the dividend distribution tax, the govt has indirectly collected the tax on dividends directly from the company at the time of declaration of dividends and the investors have been paid dividend from the balance amount after payment of dividend distribution tax.


The Dividend Distribution Tax Rates are as follows

ParticularsRate of Tax
Domestic Companies15% + 10% Surcharge + 3% Cess = 16.995%
Equity Mutual FundsNIL
Other Mutual Funds25% + 10% Surcharge + 3% Cess = 28.325%

This Dividend Distribution Tax is only required to be paid by Indian Companies. In case of any foreign company, dividend distribution tax won’t be payable and tax on dividends received would be payable as per the normal Income Tax Slabs.

 Tax on dividend

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