Dividend Under Companies Act explained: this guide covers what Dividend Under Companies Act means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
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The amount withdrawn from reserves must not exceed 10% of paid-up capital + free reserves (if dividend from reserves).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
- Board of Directors reviews financial statements and recommends dividend (Board Meeting)
- Recommendation placed before shareholders at AGM for approval (ordinary resolution)
- Shareholders can reduce the recommended rate but cannot increase it
- On approval, amount credited to a Dividend Account (separate designated bank account) within 5 days
- Payment to shareholders within 30 days of declaration at AGM
Interim Dividend Process
- Board of Directors can declare interim dividend between two AGMs (Board Resolution — not shareholder approval needed)
- Condition: declared out of surplus in P&L for that year OR from undistributed profits of previous year
- 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
- Payment within 30 days from declaration
Unpaid/Unclaimed Dividend — IEPF Transfer
| Timeline | Action |
|---|---|
| Within 5 days of declaration | Transfer dividend amount to Dividend Account |
| 30 days to 37 days from declaration | Unpaid/unclaimed dividend transferred to Unpaid Dividend Account (UDA) |
| 90 days from UDA transfer | File IEPF-2 (list of shareholders with unpaid dividend) with ROC |
| After 7 consecutive years in UDA | Transfer to IEPF (Investor Education and Protection Fund) |
| Shares corresponding to unclaimed dividend | Transfer to IEPF Demat account (IEPF-5 claim process for shareholder recovery) |
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
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