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Dividend Distribution Tax: Meaning & Rules
By Bajaj Broking Team
October 06, 2025
7 mins read
Taxes
If you’ve ever received dividends from stocks or mutual funds, you might have heard about something called Dividend Distribution Tax (DDT). Until a few years ago, this tax was deducted by companies or fund houses before they handed over the dividend to you. So, while you might have felt like you received a "tax-free" dividend, the reality was that the company had already paid tax on it.
Together, we’ll walk through what DDT was, how it worked, who paid it, and what changed after the 2020 Finance Act. This will help you understand how dividend taxation has evolved.
Who pays Dividend Distribution Tax and at what rate?
Until FY 2019-20, companies and mutual funds distributing dividends were liable to pay Dividend Distribution Tax. This meant that the tax liability was on the entity distributing the dividends, not the recipient of the dividends. The applicable rate for domestic companies was 15% of the gross dividend amount, as per Section 115-O of the Income Tax Act.
However, after including the surcharge and cess, the effective tax rate increased to approximately 20.56%. For mutual funds, the rate varied based on whether the fund was equity-oriented or debt-oriented. The tax was paid before the investor received the dividend. Therefore, the amount received by the investor was post-tax and tax-free in their hands, unless it crossed certain limits, triggering additional tax implications.
Read Also: Tax on Dividend Income
What changed in DDT rules after the 2020 Finance Act?
The Finance Act 2020 abolished the Dividend Distribution Tax, shifting the tax burden from the entity paying the dividend to the individual investor. From April 1, 2020, dividends became taxable in the hands of the recipient under the applicable income tax slab. This move aimed to create a more equitable tax structure, where high-income investors would pay a higher tax on dividends than those in lower income brackets. Consequently, companies no longer pay DDT on distributed profits. However, they are required to deduct TDS (Tax Deducted at Source) if the dividend exceeds ₹5,000 in a financial year. This change also led to the need for declaring dividend income in the investor’s Income Tax Return (ITR).
When is DDT Applicable?
DDT applied to all dividends declared, distributed, or paid by a domestic company to its shareholders before April 1, 2020. The tax liability arose at the time of distributing profits, regardless of whether the dividend was interim or final. For mutual funds, DDT was applicable on dividends paid out of the income of the schemes. The rules were the same for all companies and fund houses, and no exemptions were allowed based on the type of investor. It applied uniformly unless specifically excluded through government notification. Following the 2020 amendment, DDT ceased to be used, and the tax shifted to the individual investor who receives the dividend income.
Dividend Distribution Tax – Special Provisions
Certain exceptional cases and rates were applicable under the DDT framework:
If a holding company paid a dividend to its subsidiary (holding percentage≥ 100%), DDT was not applicable.
Domestic companies paid DDT at a rate of 15% (plus surcharge and cess), whereas mutual funds had different rates depending on the fund type.
Foreign companies receiving dividends from Indian companies were not subject to DDT, but their local tax laws applied.
Companies could not claim deductions for the amount paid as DDT while computing their income.
Deemed dividends under Section 2(22)(e) were also subject to DDT at a rate of 30%.
These provisions were valid only until DDT existed, i.e., until FY 2019-20.
Dividend Distribution Tax in Mutual Funds
In the case of mutual funds, the Dividend Distribution Tax applies only to dividend-paying schemes. Equity-oriented mutual funds were taxed at a lower rate compared to debt-oriented funds.
Equity mutual funds: DDT at 10% (plus applicable surcharge and cess)
Debt mutual funds: DDT at 25% (plus applicable surcharge and cess)
Liquid or money market funds: DDT at 25%
Individual or HUF investors: Dividend was tax-free in hand, but funds paid DDT before distribution
DDT was deducted at the scheme level, not at the investor level
Post the Finance Act 2020, all dividends from mutual funds are taxed in the hands of investors based on their income slab.
DDT on Private Companies
Private limited companies, like listed companies, were also subject to Dividend Distribution Tax under the earlier regime. The tax rate and rules were the same, i.e. 15% base rate plus surcharge and cess. The tax was paid on any dividend distributed to shareholders, irrespective of the number of shareholders or the size of the distribution. DDT also applies to deemed dividends under Section 2(22)(e) when companies extend loans to shareholders or related parties. The removal of DDT post-2020 means that private companies no longer pay DDT; instead, shareholders receiving dividends are liable to pay tax according to their income slab. Private companies are still required to deduct TDS on dividends exceeding the prescribed thresholds.
Considerations for DDT Tax
While DDT has been abolished, specific points from the old regime remain relevant for record-keeping and understanding legacy compliance requirements:
Impact on Company Profits: DDT reduced the distributable surplus of companies
Non-Deductibility: Companies could not deduct DDT payments as an expense
Double Taxation Concern: DDT led to effective double taxation once on profits, then on distributed dividends
Investor Disparity: Investors in lower slabs paid more indirectly due to flat DDT rates
Foreign Shareholders: Could claim relief under Double Taxation Avoidance Agreements (DTAA)
Reporting Requirements: DDT payments had to be reported in company filings
Understanding these considerations helps evaluate the transition to the current dividend taxation regime.
Conclusion
By now, you’ve probably got a clearer picture of how Dividend Distribution Tax used to work and why it no longer exists. The shift brought in by the 2020 Finance Act moved the tax responsibility from companies to individual investors like you. This means that the dividends you receive today are taxed based on your income slab, rather than as a flat rate paid by companies. While DDT had its role in simplifying collections earlier, the current system is more transparent and aligned with global standards. Just make sure to keep an eye on TDS and report your dividend income when filing your taxes.
Disclaimer: This article is for informational purposes and does not constitute investment advice. Bajaj Broking Financial Services Ltd. (BFSL) makes no recommendations to buy or sell securities.
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