A Guide to Dividends and Dividend Distribution Taxes

If you are someone who is looking to invest in mutual funds and other such schemes to make some extra cash on the side, the first you need to know is what the mutual fund actually is and how the mutual fund dividend works.

A Mutual Fund is a professionally managed fund which consists of money from different investors pooled together. This fund’s aim is to buy further securities like bonds, debentures (long term debt financial tool), notes, etc. If these securities perform well and gain more capital, you are in turn benefitted via dividends. It is the responsibility of the fund manager to distribute and allow the funds accordingly. There are many different types of mutual funds and schemes that work around this basic premise.

What is a Dividend?

And how does it affect your gains and losses?

What is DIvidend?

Like mentioned before, there are many different types of mutual funds. A Dividend Mutual Fund, for example, pays out in dividends. Suppose, you hold the shares of a corporation. 

Your share(s) own a certain part of the corporation and, whenever that part of the corporation earns profits, you get a portion of these profits. 

This amount of money paid out to shareholders from the gains of the company or corporation is called the dividend. The dividend is paid out annually by the company in question.

Dividend distribution is done generally through two methods. The first involves a direct payment, the dividends, in the form of cash, is deposited in the accounts of the investors. However, if the company has a dividend reinvestment plan, the same amount of money is used to buy more shares of the company, which means that you will be re-investing in the company again.

Although the income tax policy is valid for all sorts of incomes, it also applies a dividend distribution tax on the company distributing the dividends to the stockholders. Under Section 115O of the Constitution of India, the company has a tax imposed on the dividend it is paying out to the shareholders. 

The company is liable to pay the tax to the government within fourteen days of the distribution of the dividend. A rate of fifteen percent is deductible on the total amount of dividend being distributed. In case the company fails to pay the DDT within the fourteen days period, then it would be legally bound to pay an interest rate of one percent of the DDT and will have to continue doing so till the tax is paid fully.