Key takeaways

• Dividend is defined under Section 2(35) of the Companies Act, 2013 to include any interim dividend.
• Dividend can be paid only from current or prior year profit after depreciation, free reserves within Rule 3 limits, or government guarantee money, never out of capital.
• Free reserves, defined under Section 2(43), exclude unrealised gains, notional gains, and revaluation surpluses.
• Final dividend needs board recommendation and shareholder approval by ordinary resolution; shareholders can approve, reduce, or reject the recommended rate, not increase it.
• Interim dividend is a board-only decision, capped at the average of the preceding three years' rates if the company is currently loss-making.
• Declared dividends must reach a separate bank account within 5 days and shareholders within 30 days; missing the 30-day deadline is a criminal offence under Section 127, not just a civil lapse.
• Unpaid dividend moves to the Unpaid Dividend Account after 30 days, then to the Investor Education and Protection Fund after 7 years if still unclaimed.
• Section 8 companies cannot declare dividend under any circumstances, since Section 8(1)(c) makes this a condition of their licence.
• Dividend Distribution Tax was abolished in 2020; dividends are now taxed in the shareholder's hands, with TDS deducted above a ₹10,000 annual threshold per shareholder.

What counts as a dividend under the Companies Act, 2013

Section 2(35) of the Companies Act, 2013 defines dividend to include any interim dividend. The Act does not otherwise spell out what dividend means in economic terms; it refers to the portion of a company's profit that the company distributes to shareholders in proportion to the shares they hold, as opposed to profit the company retains and reinvests.

That single-sentence definition carries a specific consequence founders often miss. Because interim dividend falls inside the statutory meaning of dividend, every provision that regulates "dividend" elsewhere in the Act, the sourcing restrictions in Section 123, the payment timeline in Section 127, the unpaid dividend mechanism in Section 124, applies identically to an interim payout declared by the board mid-year and a final payout approved by shareholders at the annual general meeting (AGM).

Dividend rights themselves are not uniform across a company's shareholders. Equity shares typically carry a residual, discretionary right to dividend. Preference shares usually carry a fixed dividend rate with priority over equity, and the priority and rate are agreed at issuance rather than left to board discretion. If your cap table includes both classes, this affects how a declared dividend is actually split. EquityList's guide on non-participating preference shares covers how that priority is structured and calculated.

Interim dividend vs final dividend

Which companies can declare a dividend, and what conditions must be met

Every company, private or public, can declare a dividend except one category: companies registered under Section 8 of the Companies Act, 2013. Section 8 licences are issued specifically to entities formed to promote commerce, art, science, sports, education, research, social welfare, religion, charity, or environmental protection, and the licence itself is conditioned on the company applying its income solely toward those objects. Section 8(1)(c) makes the prohibition on paying dividends to members.

For every other company, three gating conditions determine whether the board can even bring a dividend recommendation to the table.

No default under Sections 73 or 74. Section 123(6) blocks a company from declaring any dividend on its equity shares for as long as it is in default on repaying deposits (Section 73) or repaying deposits accepted before the 2013 Act came into force (Section 74). The logic is straightforward: a company that owes money to depositors should not be distributing profit to shareholders while depositors wait to be repaid.

Depreciation must be provided first. Before computing the profit available for dividend, the company must provide for depreciation on its depreciable assets as prescribed in Schedule II of the Act. This ensures the "profit" being distributed reflects genuine surplus after accounting for the wear and consumption of the company's assets.

What a dividend can legally be paid out of

Section 123(1) restricts dividend to three sources: the company's profit for the current financial year after providing for depreciation, undistributed profit from previous financial years after depreciation, or money the Central or State Government provides specifically to fund a dividend payment under a guarantee it has given.

A fourth route exists for companies with inadequate or absent profit in a given year: dividend can be declared out of free reserves, defined under Section 2(43) as reserves that, per the company's latest audited balance sheet, are genuinely available for distribution. 

Drawing on free reserves is not unconditional. Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014 sets four limits on a company using this route:

• The declared rate cannot exceed the average of the rates the company declared in the three immediately preceding financial years. This does not apply to a company that has not declared any dividend in each of those three years.
• The total amount drawn from accumulated profits cannot exceed one-tenth of the sum of the company's paid-up share capital and free reserves, as shown in the latest audited financial statement.
• Any amount drawn must first be used to set off losses incurred in the year the dividend is declared, before any dividend on equity shares is paid.
• After the withdrawal, the company's remaining reserves cannot fall below 15% of its paid-up share capital.

Step-by-step process for declaring and paying a final dividend

1. Board meeting to recommend the rate. The board convenes with at least 7 clear days' notice under Section 173, reviews the audited financial statements, and passes a resolution recommending a dividend rate. The board can only recommend; it does not have authority to finalise the payout at this stage.
2. Notice of the AGM. The company includes the dividend recommendation on the agenda of the AGM notice, which goes out to shareholders per the standard notice period requirements for a general meeting.
3. Shareholder approval by ordinary resolution. At the AGM, shareholders vote on the board's recommended rate. An ordinary resolution, meaning votes in favour exceed votes against, is sufficient to approve it. Shareholders can approve the recommended amount, reduce it, or reject it outright, but they cannot vote to increase it beyond what the board proposed.
4. Transfer to a separate bank account within 5 days. Once declared, Section 123(4) requires the company to move the total dividend amount into a separate account at a scheduled bank within 5 days of declaration. This creates a ring-fenced pool of funds specifically earmarked for shareholder payout, separate from the company's operating accounts.
5. Payment to shareholders within 30 days. The company must actually pay or post the dividend to every entitled shareholder within 30 days of declaration. Payment goes only to the registered shareholder, their nominated order, or their banker, and it must be in cash (which includes cheque, dividend warrant, which is a company-issued payment instrument functioning like a cheque, or electronic transfer; it cannot be paid in kind), except that this does not prevent the company from separately issuing bonus shares or paying up partly-paid shares using its reserves.

If your company is listed, this process runs alongside SEBI's Listing Obligations and Disclosure Requirements (LODR). Listed entities have separate disclosure obligations tied to the dividend, including notifying the stock exchange ahead of the board meeting where dividend is considered. SEBI's Regulation 43A required the top 500 (later top 1,000) listed entities to maintain a standalone dividend distribution policy from 2016 onward, but the SEBI (LODR) (Amendment) Regulations, 2024 omitted Regulation 43A effective 31 December 2024. If you operate a listed company, confirm the current disclosure position against the latest LODR text or the gazette notification directly rather than relying on commentary describing the older policy mandate.

What happens when a dividend goes unpaid or unclaimed

If a shareholder does not receive or claim a declared dividend within 30 days of declaration, Section 124 requires the company to transfer the unpaid or unclaimed amount, within 7 days of that 30-day window closing, into a separate account called the Unpaid Dividend Account, opened at a scheduled bank. Within 90 days of that transfer, the company must publish a statement listing the names, last known addresses, and unpaid amounts on its website.

If the company misses the transfer deadline, it owes interest at 12% per annum on the amount not transferred, calculated from the date of default, and that interest accrues for the benefit of the shareholders still owed the money. A shareholder can apply to the company at any time to claim money sitting in the Unpaid Dividend Account.

Money that stays in the Unpaid Dividend Account unclaimed for 7 years from the date of transfer, along with any interest earned on it, moves to the Investor Education and Protection Fund (IEPF), a central government fund administered under Section 125. Once transferred to the IEPF, the shareholder can apply to the IEPF Authority for a refund of the amount, following the Authority's verification procedure. This 7-year transfer exists to prevent dividend liabilities from sitting indefinitely on a company's books while giving genuinely entitled shareholders a route to recover funds through a central authority rather than relying on the paying company's records years later.

A company that fails to comply with the Unpaid Dividend Account requirements is liable to a penalty of ₹1 lakh, plus a further ₹500 for each day the failure continues, capped at ₹10 lakh. Every officer in default faces a separate penalty of ₹25,000, plus ₹100 per day of continuing failure, capped at ₹2 lakh.

Penalties for non-compliance with dividend rules

Section 127 makes non-payment a criminal offence: every director knowingly party to the default faces imprisonment of up to 2 years and a fine of at least ₹1,000 for every day the default continues, and separately, the company must pay simple interest at 18% per annum for the duration of the default. This remained a criminal provision even after the Companies (Amendment) Act, 2020 converted many other Companies Act defaults, including the Unpaid Dividend Account failure above, from criminal fines into civil penalties. The distinction reflects how the law treats a company simply failing to pay shareholders what it already promised them as a more serious breach of trust than a procedural lapse in account administration.

How dividends are taxed, including payments to non-resident shareholders

Dividend Distribution Tax (DDT), the tax the company itself used to pay on declaring a dividend, was abolished by the Finance Act, 2020, effective from FY 2020-21. Since then, dividend income is taxed directly in the shareholder's hands at their applicable income tax slab rate, and the company's obligation shifted from paying DDT to deducting tax at source before the payout reaches the shareholder.

As of April 1, 2026, the Income-tax Act, 1961 has been repealed and replaced by the Income-tax Act, 2025. The dividend withholding provision that founders and finance teams will recognise as "Section 194" now sits under Section 393(1) of the new Act. The substance is unchanged. For resident shareholders, the company deducts tax at 10% if PAN is furnished, or 20% if it is not, once a shareholder's total dividend from that company crosses ₹10,000 in a financial year, a threshold raised from the earlier ₹5,000 limit by Budget 2025 effective April 1, 2025. Certain payees, including LIC, GIC, other insurers holding shares beneficially, and mutual funds, are excluded from this deduction.

FAQs on dividend declaration

What is a dividend declaration?

A dividend declaration is the formal corporate action by which a company decides to distribute part of its profit to shareholders. For final dividend, the board recommends a rate and shareholders approve it by ordinary resolution at the AGM. For interim dividend, the board can declare it on its own, subject to the sourcing and rate conditions under Section 123 of the Companies Act, 2013.

How do you declare a dividend?

The process differs by type. Final dividend requires the board to recommend a rate at a board meeting, followed by shareholder approval at the AGM through an ordinary resolution. Interim dividend requires only a board resolution, sourced from current or year-to-date profit, without shareholder approval. Both types must then move to a separate bank account within 5 days and reach shareholders within 30 days of declaration.

Can a company declare a dividend without profit?

Yes, but only through free reserves, and only within limits. Under Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014, a company with inadequate or absent profit in a given year can declare dividend out of free reserves, subject to the rate cap, the one-tenth ceiling on the amount drawn, the requirement to first set off current-year losses, and the 15% minimum reserve floor described earlier. What a company cannot do, under any circumstance, is declare a dividend out of capital.

Is there a maximum dividend a company can declare?

The Companies Act does not set a maximum dividend amount. A company can distribute the full extent of its distributable profit for the year if the board recommends it and shareholders approve it. The ceilings in the Act only apply to the narrower case of dividend drawn from free reserves under Rule 3, not to dividend paid out of current profit.

What happens if a dividend isn't paid within 30 days of declaration?

Once a dividend is declared, the company must pay it within 30 days. Missing that deadline is a criminal offence under Section 127: every director knowingly party to the default can face imprisonment of up to 2 years and a fine of at least ₹1,000 per day of continued default, and the company must additionally pay 18% annual interest for the delay period, unless one of the Act's specific exceptions, such as a genuine dispute over entitlement, applies.