What is the dividend distribution tax?

A dividend is nothing but a distribution of a portion of a company’s earnings. While, dividend distributions tax is nothing but a tax on the distribution of profits by the company to its shareholders.

Who is responsible for dividend distribution tax?

When a domestic company pays a dividend, it’s liable to pay the dividend distribution tax @15%. However, in the case of deemed dividend, u/s 2(22)(e) the rate of tax is 30% and the same is exempt in the hands of the shareholder.

What is the limit for dividends?

There is no set limit for paying dividends. If the company is earning profits and want to distribute the same to its shareholders, it can do the same without any minimum limits in place.

Is dividend income taxable income?

ParticularsTaxability in the hands of the shareholder
When a domestic company distributes dividend[including deemed dividend u/s 2(22)(a) to 2(22)(d)The dividend is exempt in the hands of the shareholder up to Rs. 10 lakh. Dividend above Rs. 10 lakh is taxable @10%
Deemed dividend u/s 2(22)(e)The dividend is exempt in the hands of the shareholder.

Is TDS deducted on dividends?

Since the abolition of the dividend distribution tax, TDS is applicable at a rate of 5% for dividend income exceeding Rs. 5,000 in a financial year. Therefore, the company distributing the dividend will deduct the TDS on the dividends paid to the shareholders. 

What are the two types of dividend?

Dividends are the proportion of the profits. The company pays it to the shareholders depending on the company’s performance. The two types of dividend are interim and final dividend. The interim dividend is paid during the year. While the final dividend is paid only when it’s approved in the annual general meeting.

What is the difference between the interim and final dividend?

Interim DividendFinal Dividend
Such a dividend is declared and paid by the company between two annual general meetings of a companyFinal dividend is declared and paid after the annual general meeting of the company.
The dividend is paid before the finalization of accounts of a yearThe dividend is paid after the finalization of accounts of a year.
The rate of dividend is always less than the rate of final dividend.Rate of final dividend is more than the interim dividend

Should you reinvest your dividends?

Under the dividend reinvestment option, the dividends are not passed on to the investors. Instead, it is reinvested towards the investment in the scheme which results in extra units for the investor.

The adjustment to the net asset value is according to the dividend amount. The investors can consider reinvesting the dividend if their investment horizon is short-term as well as the dividend is regular.

What is the difference between dividend and capital gain distributions?

The dividend is paid out of the profits a company earns. The capital gains arises when an investor sells a capital asset after a period of time. 

Does dividend affect NAV?

Yes, the dividend does affect the NAV in case of a dividend reinvestment plan in line with the dividend declared. The mutual fund sells the shares held in the scheme and distribute the dividends from the profits earned through that sale. This results in a reduction in the NAV as the mutual fund is withdrawing the money from the fund and distributing it to the unit holders.