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Dear Reader,
The Company Secretary Team at UJA is pleased to present a comprehensive overview of Dividend under the Companies Act, 2013, covering the legal framework, procedural requirements, taxation and key compliance obligations associated with declaration and payment of dividends.
This article aims to provide a practical understanding of the statutory provisions governing dividends, including the conditions for declaration, declaration out of free reserves, timelines for payment, transfer of unpaid dividends to the Unpaid Dividend Account and the Investor Education and Protection Fund (IEPF), taxation of dividend income and the consequences of non-compliance.
Through this write-up, we seek to simplify the regulatory provisions relating to downstream investment while highlighting the importance of proper transaction structuring, timely reporting, and adherence to the applicable provisions of the Companies Act, 2013. Given the increased regulatory focus on dividend governance, companies should establish robust processes to ensure accurate and timely compliance with statutory obligations.
We hope you find this article informative and useful in enhancing your understanding of downstream investment regulations and the compliance framework governing indirect foreign investment in India.
For feedback or topic suggestions, please write to us at cs@uja.in.
Dividend is the return distributed by a company to its shareholders out of its distributable profits. It represents the reward to shareholders for investing their capital in the company and reflects the company’s financial performance and profitability.
The declaration and payment of dividend is one of the most significant decisions taken by the Board of Directors and the shareholders, as it directly affects investors while also requiring strict compliance with the provisions of the Companies Act, 2013.
The Companies Act, 2013 lays down a comprehensive legal framework governing the declaration, payment, transfer and management of unpaid dividends. These provisions are primarily contained in Sections 123 to 127 of the Act, supplemented by the Companies (Declaration and Payment of Dividend) Rules, 2014.
From a Company Secretary’s perspective, ensuring compliance with these provisions is essential to safeguard the interests of shareholders, maintain corporate governance standards and avoid statutory penalties.
The Companies Act, 2013 does not provide an exhaustive definition of “Dividend.” However, Section 2(35) states that: “Dividend” includes any interim dividend.
This means that for the purposes of the Act, the term “dividend” covers both:
Accordingly, unless the context otherwise requires, every provision relating to dividend under the Companies Act applies equally to interim dividend.
A Final Dividend is recommended by the Board of Directors after considering the financial statements of the company and is declared by the members at the Annual General Meeting (AGM).
An Interim Dividend is declared by the Board of Directors at any time during the financial year or during the period between the closure of the financial year and the holding of the AGM.
| Particulars | Interim Dividend | Final Dividend |
| Authority | Board of Directors | Shareholders (on Board’s recommendation) |
| Timing | During the year or before AGM | At the Annual General Meeting (AGM) |
| Revocability | Can be revoked with Board consent | Once declared, it is a debt |
| Source | P&L Surplus / Current Year Profits | Audited Financial Statements |
The statutory provisions relating to dividend are contained in:
As per Section 123(1) of the Companies Act, 2013, a company can only declare dividends from:
You must exclude unrealized gains, notional gains, or revaluation of assets when calculating “profits.” Before declaring any dividend, the company may transfer such percentage of its profits to reserves as it may consider appropriate.
“INADEQUACY OF PROFITS” RULE
If a company has no profits but still wants to pay a dividend from reserves, it must meet below conditions {Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014}:
A company that fails to comply with Section 73 (Prohibition of acceptance of deposits) or Section 74 (Repayment of existing deposits) cannot declare equity dividends. {Section 123(6) of the Companies Act, 2013}
The shareholder, however, is not deprived of ownership permanently; they can reclaim their shares by following the prescribed IEPF claim process. {Section 124(6) of the Companies Act, 2013}
Since 1 April 2020, Dividend Distribution Tax (DDT) has been abolished and dividends are taxable in the hands of the shareholders.
Section 127 of the Companies Act, 2013 penalizes a company and its directors when a declared dividend is not paid within 30 days from the date of declaration.
The Institute of Company Secretaries of India (ICSI) has issued Secretarial Standard – 3 which is about the dividend, the adherence of which is recommendatory.
The Adjudicating Authority imposed a penalty of INR 10,000 each on the company and on one of the directors for default. {Order ID: PO/ADJ/12- 2025/BL/01182 dated 15th December, 2025}
The Adjudicating Authority imposed a penalty of INR 10,000 each on the company and on three of the directors for default. {Order ID: PO/ADJ/12-2025/MB/01029 Dated: 5th December, 2025}
A: Once declared, a dividend must be paid, or dividend warrants posted, within 30 days from the date of declaration, as per Section 124(1) of the Companies Act, 2013.
A: If unclaimed within 30 days, the amount must be transferred to a separate “Unpaid Dividend Account” within 7 days. If it remains unclaimed for 7 consecutive years, both the dividend and the underlying shares must be transferred to the Investor Education and Protection Fund (IEPF), though shareholders can still reclaim them later through the IEPF claim process.
A: Yes, but only under specific conditions, the dividend rate cannot exceed the average of the last 3 years’ rates, total withdrawal cannot exceed 1/10th of paid-up capital plus free reserves, current year losses must be set off first, and reserves after withdrawal must not fall below 15% of paid-up share capital.
A: Yes. Since the abolition of Dividend Distribution Tax (DDT) on 1 April 2020, dividend income is taxable in the hands of shareholders under “Income from Other Sources.” Companies must also deduct TDS at 10% on dividends exceeding INR 10,000 paid to resident shareholders in a financial year.
A: Under Section 127, defaulting directors may face imprisonment up to 2 years and a fine of at least INR 1,000 per day of default, while the company must pay 18% simple interest per annum on the unpaid amount.
For Exa: ROC Bangalore penalized SYRATRON TECHNOLOGIES PRIVATE LIMITED and one of its directors ₹10,000 each for failing to deposit a declared interim dividend into a separate scheduled bank account (as required under Section 123(4)), instead crediting it to the company’s regular current account. (Order dated 15th December 2025)
The provisions governing dividend under the Companies Act, 2013 are designed to ensure that dividends are declared only out of legitimate distributable profits, paid within the prescribed time, and that unclaimed amounts are properly administered through the Unpaid Dividend Account and the Investor Education and Protection Fund.
Sections 123 to 127, read with the Companies (Declaration and Payment of Dividend) Rules, 2014, establish a complete statutory framework covering declaration, payment, unpaid dividends, transfer to IEPF and consequences of non-compliance.
The amendment introduced by the Companies (Amendment) Act, 2017 further strengthened this framework by ensuring that unrealised gains, notional gains, revaluation gains and fair value adjustments are excluded while computing profits available for declaration of dividend. Compliance with these statutory provisions is essential for every company to ensure lawful distribution of profits and protection of shareholders’ interests.
Don’t let compliance oversight turn into a costly penalty. Talk to UJA Global Advisory’s Company Secretarial team to ensure your dividend declaration, payment & IEPF compliance processes are fully aligned with the Companies Act, 2013.
Compliance Tip:
Missing dividend deadlines can be costly. Under the Companies Act, 2013, dividends must be deposited in a separate bank account within 5 days of declaration & paid to shareholders within 30 days—failing which, both the company and its directors face penalties, including interest, fines & even imprisonment for defaulting directors.
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