Dividend Under Companies Act 2013: Declaration Process, Interim and Final Dividend Rules

Dividend is the portion of a company's profits distributed to its shareholders. Governed by Sections 123-127 of the Companies Act 2013, dividend declaration involves specific procedural requirements, source restrictions, and compliance obligations.

Sources of Dividend (Section 123)

Dividend can be paid only out of:

• Current year profits: Profits of the current financial year after providing for depreciation (as per Schedule II or useful life basis)
• Previous year undistributed profits: Accumulated P&L balance after deducting previous losses and depreciation not provided
• Free reserves: General reserve, dividend equalisation reserve, other free reserves created from profits (NOT share premium, capital redemption reserve)

The amount withdrawn from reserves must not exceed 10% of paid-up capital + free reserves (if dividend from reserves).

Mandatory Transfer to Reserves (Section 123(1))

If the proposed dividend rate is more than 10% of paid-up share capital:

• At least 2.5% of current year profits must be transferred to reserves before declaring the dividend
• This is the only mandatory minimum reserve transfer under the 2013 Act (Companies Amendment Act 2017 removed higher percentages)

Final Dividend Process

1. Board of Directors reviews financial statements and recommends dividend (Board Meeting)
2. Recommendation placed before shareholders at AGM for approval (ordinary resolution)
3. Shareholders can reduce the recommended rate but cannot increase it
4. On approval, amount credited to a Dividend Account (separate designated bank account) within 5 days
5. Payment to shareholders within 30 days of declaration at AGM

Interim Dividend Process

1. Board of Directors can declare interim dividend between two AGMs (Board Resolution — not shareholder approval needed)
2. Condition: declared out of surplus in P&L for that year OR from undistributed profits of previous year
3. If company has incurred a loss in current year up to the date of interim dividend, rate shall not exceed average dividend declared in 3 preceding years
4. Payment within 30 days from declaration

Unpaid/Unclaimed Dividend — IEPF Transfer

Tax on Dividend — Post April 2020

• DDT (Dividend Distribution Tax) abolished from 1 April 2020 (Finance Act 2020)
• Dividend is taxable income of the shareholder at applicable slab rate
• Company deducts TDS at 10% under Section 194 (resident) / 20% or DTAA rate (non-resident) if dividend > Rs.5,000
• Shareholder can set off interest expense (max 20% of dividend) against dividend income under Section 57

Violation — Section 127

If dividend is not paid within 30 days of declaration without reasonable cause:

• Every director (liable) — imprisonment up to 2 years and/or fine Rs.1,000/day of default
• Company — interest at 18% per annum on unpaid dividend amount