Budget 2014: Revised Dividend Distribution Tax Calculator

The dividend distribution tax (DDT) to be paid by the AMCs whenever a dividend is announced on non-equity mutual funds is 28.325% (25% + 10% surcharge + 3% education cess).

According to the announcement made on budget day, with effective from October 1st 2014, the way in which DDT is calculated has been revised.

In this post, we will try to understand the ‘old’ and ‘new’ methods of calculating DDT.

For those who can understand the strange language adopted by the income tax guys, here is the official wording:

The Finance (No. 2) Bill, 2014 proposes that for the purpose of determining the tax payable, the amount of distributed income be increased to such amount as would, after reduction of tax from such increased amount, be equal to the income distributed by the Mutual Fund. The proposed change is effective from 1 October 2014.

Source: Tata Mutual Fund tax recokoner shared by ‘IFA Galaxy’ Srini at facebook group Asan Ideas of Wealth (AIFW)

Credits:
Old method:  article on Effective DDT  (not available anymore)
New method: AIFW tax expert Sundaram Anathakrishnan

Let us assume DDT = 25% for simplicity. You can put in the actual DDT in the calculator below.

Old Method of computing DDT

Distributable income available = Rs. 100

Actual dividend paid = D

We write, 100 -(D x 25%) = D

D = 100/ (1+25%) = 80

Since pre-tax amount = 100
post-tax amount = 80

The effective tax rate or effective DDT is

(80/100) -1 = -20%  (negative sign because it is a tax!)

Thus in this example,

effective DDT = 20%
Actual DDT = 25%

Had there been no DDT, the investor would have had to pay 20% tax on Rs. 100. That is the net dividend would be Rs. 80.
Taking this into account, although the DDT is 25%, the effective tax ‘paid’ by the investor is only 20%

We can write,

D = 100 x (1-EDDT)

Where EDDT is the effective DDT

EDDT  = DDT/(1+DDT)

Since  the actual DDT = 28.325%

the effective DDT is 22.0729%    That is, 28.325%/(1+28.325%)

Thus someone in 30% tax slab has a tax arbitrage of 8.83% (30.9% – 22.0729%)

New Method of computing DDT

The new method removes the idea of an effective DDT.

That is,
If DDT = 25% and
if distributable income available = Rs. 100

Actual dividend paid = D = 100 x (1-25%) = 75

Or in other words, the effective DDT,

(75/100) -1 = -25%

is the same as the actual DDT!

Since the actual DDT = 28.325%

effective DDT = 28.325%

Thus someone in 30% tax slab has a tax arbitrage of 2.58% (30.9% – 28.325%)

This is a whopping reduction of 6.25%

Use this calculator to play with the numbers yourself

Download the Dividend Distribution Tax Calculator

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