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New amendment with Dividend Distribution Tax in Budget 2014

July 28, 2014

New amendment with Dividend Distribution Tax in Budget 2014In the current Budget 2014, a significant modification regarding Dividend Distribution Tax (DDT) is included that is pertinent to the dividends (whether interim or otherwise) announced, allocated or disbursed by a domestic company, (public or private limited, listed or otherwise) to its shareholders or through a non-equity oriented mutual fund to its unit holders.

 

At present, in both cases, such dividend or income bears supplementary tax – @15% (16.995% including surcharge @10% and cess @3%) on dividends shared out to its shareholders by a company u/s 115(O) and @25% (28.325% involving surcharge and cess) on income allocated by MFs to unit holders (Individuals and HUF) u/s 115(R).

This modification will be introduced from 1.10.14 and as a result, its retrospective applicability, if any, is least possible.

 

Suppose an assessee has received a dividend of Rs. 71.6750
DDT applicable on this amount = 71.6750 x 28.325% This amount is deemed to be income of the assessee and charged to DDT 20.3019
DDT applicable on this amount = 20.3019 x 28.325% This amount is deemed to be income of the assessee and charged to DDT 5.7505
DDT applicable on this amount = 5.7505 x 28.325% This amount is deemed to be income of the assessee and charged to DDT 1.6288
Continuing this process ad Infinitum, the total of the income and deemed income is 100.00

 

The Finance Bill has adopted this method of computing the Income on which DDT has to be applied.

 

Let me make it simple for you. Suppose the dividend income is Rs. 100.00
DDT applicable on this amount = 100.000 x 28.325% = The MF is required to pay Rs. 71.675 as dividend to the shareholder and Rs.28.325 as TDS to the exchequer. 28.325
Prior to this amendment, the DDT charged was Rs. 20.3019. Now he will be paying addi¬tional DDT amounting to Rs. 8.0231 (=28.3250 — 20.3019).
In effect, from point of view of the revenue, the DDT rate has remained put at 28.325% and from the point of view of the investor it has gone up to 39.51% ((28.325 / 71.675) * 100)!!
Incidentally, corresponding rise in the case of dividend paid by a company to its sharehold¬ers is from 16.995% to 20.47%.

 

Redemption amount = (1.0926)ˆ3*100 = Rs.130.4458
Cost of acquisition = Rs. 100
Cost Inflation index for FY 14-15 = 1,024
Cost Inflation index for FY 11-12 = 785
Indexed Cost = 100*(1024/785) = 130.4458
LTCG is nil and therefore, 9.26% is tax-free!

 

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