Section 2 explained: this guide covers what it 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.
Clauses (36) to (48) of section 2 define the senior tax officers, "dividend", "domestic company", "fair market value", "firm", "foreign company" and "hearing". The longest is clause (40), "dividend", which is an inclusive definition with five included limbs and five excluded items. This article explains the clauses as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026.
"Dividend" in clause (40) includes distributions out of accumulated profits and certain loans or advances by a closely held company to a substantial shareholder, up to the accumulated profits. The Finance Act, 2026 omitted sub-clause (f) and substituted sub-clause (v) of the exclusions, both from 1 April 2026. "Fair market value" is the open-market price on the relevant date, or a price determined as may be prescribed. A "foreign company" is any company that is not a domestic company.
Where this article sits
This is the second article on section 2. Clauses (1) to (21) are in the first article, clauses (22) to (35) in the article on capital asset and demerger, and clauses (49) to (76) in the article on income, India and interest. Section 2 was amended by section 35 of the Finance Act, 2026. For planning a company's distributions, our tax planning advisory team can walk through these clauses with you.
Clauses (36) to (39): officers and company officers
| Clause | Term | Meaning |
|---|---|---|
| (36) | Deputy Commissioner | A person appointed to be a Deputy Commissioner of Income-tax under section 237(1) |
| (37) | Deputy Director | A person appointed to be a Deputy Director of Income-tax under section 237(1) |
| (38) | director, manager | In relation to a company, the meanings in section 2(34) and (53) of the Companies Act, 2013 |
| (39) | Director General or Director | A person appointed Director General or Director of Income-tax under section 237(1), and includes a Principal Director General, Principal Director, Additional Director, Joint Director, Deputy Director or Assistant Director |
The Companies Act, 2013 is another law; check it for clause (38).
Clause (40): dividend
Dividend includes the following, in each case to the extent stated:
- (a) any distribution by a company of accumulated profits, whether capitalised or not, if it entails the release to shareholders of all or part of the company's assets;
- (b) any distribution to shareholders of debentures, debenture-stock or deposit certificates, with or without interest, and any distribution of bonus shares to preference shareholders, to the extent the company possesses accumulated profits;
- (c) any distribution on liquidation, to the extent attributable to the accumulated profits immediately before liquidation;
- (d) any distribution on reduction of capital, to the extent the company possesses accumulated profits;
- (e) any payment by a company that is not a company in which the public are substantially interested (see clause (29) in the second article), of a sum as an advance or loan to a shareholder who is the beneficial owner of shares holding not less than 10 per cent of the voting power, or to a concern in which that shareholder is a member or partner with a substantial interest, or made on behalf of or for the individual benefit of such a shareholder, to the extent the company possesses accumulated profits.
Sub-clause (f) is shown as omitted. The Finance Act, 2026 omitted it with effect from 1 April 2026. The text as it stands has no sub-clause (f).
What dividend does not include
| Item | Not dividend |
|---|---|
| (i) | A distribution under sub-clause (c) or (d) on a share issued for full cash consideration, where the holder is not entitled in a liquidation to participate in the surplus assets |
| (ii) | An advance or loan to a shareholder or the said concern in the ordinary course of business, where lending of money is a substantial part of the company's business |
| (iii) | A dividend set off by the company against a sum previously paid and treated as dividend under sub-clause (e), to the extent of the set-off |
| (iv) | A distribution of shares on a demerger by the resulting company to the shareholders of the demerged company, whether or not capital is reduced in the demerged company |
| (v) | An advance or loan between two group entities where one is a "Finance Company" or "Finance Unit", the other is located in a country or territory outside India, and the parent or principal entity of the group is listed on a stock exchange in a country or territory outside India; the countries or territories for the last two conditions are to be specified by the Central Government by notification |
Item (v) is as substituted by the Finance Act, 2026, with effect from 1 April 2026. What has been notified is not in the text consulted. For items (ii), the text says nothing about any size of loan.
Meanings that go with clause (40)
- Accumulated profits include all profits of the company up to the date of distribution or payment for sub-clauses (a), (b), (d) and (e); for sub-clause (c) they include all profits up to the date of liquidation, but where liquidation follows compulsory acquisition of the undertaking by the Government or a Government-owned or controlled corporation, they do not include profits before the three successive tax years immediately preceding the tax year of acquisition.
- For an amalgamated company, the accumulated profits (or loss) are increased by those of the amalgamating company on the date of amalgamation.
- Concern means a Hindu undivided family, a firm, an association of persons, a body of individuals or a company.
- A person has a substantial interest in a concern other than a company if, at any time during the tax year, he is beneficially entitled to not less than 20 per cent of its income.
- For exclusion (v): "Finance Company" and "Finance Unit" take their meaning from regulation 2(1)(e) and (f) of the International Financial Services Centres Authority (Finance Company) Regulations, 2021, and the entity must be set up as a global or regional corporate treasury centre; "group entity" takes its meaning from the expression "group entities" in the International Financial Services Authority (Payment Services) Regulations, 2024 (printed in that form in the text); and "parent entity" or "principal entity" is an entity of which the other group entities are subsidiaries and which exercises or controls more than one-half of the total voting power, alone or with subsidiaries, or controls the composition of the Board of Directors. The "group entity" and "parent entity" meanings are as substituted by the Finance Act, 2026. These are other laws; check them.
For the related capital-gains rule on a company buying its own shares, see the article on sections 68, 69 and 71.
Example: a loan to a shareholder
Nova Components Pvt Ltd (invented) is a closely held company and is not a company in which the public are substantially interested. Sunil holds shares carrying 12 per cent of the voting power, beneficially. The company lends him Rs. 5,00,000 and has accumulated profits of Rs. 3,00,000 on the date of the loan. Under clause (40)(e) the loan is dividend to the extent of the accumulated profits, so Rs. 3,00,000 is treated as dividend and the balance of Rs. 2,00,000 (5,00,000 minus 3,00,000) is not. The text of clause (40) does not state how the dividend is taxed; other sections deal with that. If lending were a substantial part of Nova's business and the loan were in the ordinary course, exclusion (ii) would apply instead.
Clauses (41) to (48): shorter definitions
- Document (41): includes an electronic record as defined in section 2(1)(t) of the Information Technology Act, 2000.
- Domestic company (42): an Indian company, or any other company that has made the prescribed arrangements within India for the declaration and payment of dividends (including on preference shares) payable out of its income liable to tax under the Act. The detail is left to the Income-tax Rules, 2026.
- Electoral trust (43): a trust so approved by the Board as per the scheme made by the Central Government.
- Fair market value (44): in relation to a capital asset, (a) the price it would ordinarily fetch on sale in the open market on the relevant date; and (b) where that price is not ascertainable, the price determined in the manner as may be prescribed.
- Firm (45): the meaning in section 4 of the Indian Partnership Act, 1932, and includes a limited liability partnership as defined in section 2(1)(n) of the Limited Liability Partnership Act, 2008 (the text prints the Act as "(6 of 2009)").
- Foreign company (46): a company that is not a domestic company.
- Foreign currency (47): the meaning in section 2(m) of the Foreign Exchange Management Act, 1999.
- Hearing (48): includes communication of data and documents through electronic mode.
Need help with distributions and loans in a company?
Loans between a company and its shareholders and the declaration of dividend raise questions that depend on the facts. For a review of your company's position, speak to our tax planning advisory team.
Key takeaways
- Dividend under clause (40) is inclusive: five included limbs, five exclusions.
- A loan to a 10 per cent shareholder can be dividend up to the accumulated profits, if the company is not one in which the public are substantially interested.
- Sub-clause (f) is omitted and exclusion (v) is substituted by the Finance Act, 2026, from 1 April 2026.
- Fair market value is the open-market price on the relevant date, or a prescribed determination.
- A firm includes a limited liability partnership.
- A foreign company is simply a company that is not a domestic company.
Read next
- Section 2: capital asset, charitable purpose, company and demerger (clauses 22 to 35)
- Section 2: income, India, interest and long-term capital asset (clauses 49 to 76)
- Section 2: accountant to business trust (clauses 1 to 21)
- Sections 68, 69 and 71: liquidation, buy-back and withdrawal of exemption
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.