Dividend Declaration and Payment Rules under the Companies Act, 2013

Dividend Declaration and Payment Rules under the Companies Act, 2013

Dividend is the most visible way a company shares its profits with shareholders, but the Companies Act, 2013 imposes clear rules on when and how much can be declared, to prevent companies from distributing money they don't actually have available, or shortchanging creditors and future capital needs.

•      Profits of the company for the financial year, arrived at after providing for depreciation.

•      Profits of the company for any previous financial year(s), arrived at after providing for depreciation and remaining undistributed.

•      Money provided by the Central or State Government for payment of dividend in pursuance of a guarantee given by the government.

•      Free reserves, where profits are inadequate or absent in a year, subject to prescribed conditions and rate limits under the Companies (Declaration and Payment of Dividend) Rules, 2014.

The Board recommends the rate of dividend, and the final dividend is declared by shareholders at the AGM by ordinary resolution — shareholders can approve a lower rate than recommended by the Board, but cannot increase it. The Board can also declare an 'interim dividend' during the financial year, out of surplus in the profit and loss account or profits of the financial year (or immediately preceding financial year, in certain circumstances) without needing shareholder approval.

Once declared, dividend must be paid to shareholders within 30 days of declaration. A company cannot declare dividend unless carried-over previous losses and depreciation not provided for in previous years are set off against the profits of the current year.

Dividend that remains unpaid or unclaimed for 30 days from declaration must be transferred to a special 'Unpaid Dividend Account' within 7 days of expiry of the 30-day period. Any amount remaining unclaimed in this account for 7 consecutive years must then be transferred, along with the corresponding shares, to the Investor Education and Protection Fund (IEPF), from where shareholders can subsequently claim a refund following a prescribed process.

•      Declaring dividend without properly setting off prior years' losses and unprovided depreciation first.

•      Missing the 30-day payment deadline, exposing directors to potential imprisonment risk under Section 127.

•      Forgetting to transfer unclaimed dividend to the Unpaid Dividend Account within the 7-day window.

•      Failing to notify shareholders before their unclaimed dividend/shares are transferred to the IEPF after 7 years.

Q1. Can a company declare dividend if it has incurred losses in the current year?

Yes, subject to conditions under the Companies (Declaration and Payment of Dividend) Rules, 2014, a company can declare dividend out of free reserves even in a loss-making year, but subject to limits on the rate of dividend and the amount that can be drawn from reserves.

Q2. Is dividend taxable in the hands of shareholders?

Yes, since April 2020, dividend income is taxable in the hands of shareholders at applicable slab rates, and the company is required to deduct tax at source (TDS) on dividend payments above the prescribed threshold under the Income-tax Act.

Q3. Can shareholders claim their dividend after it has been transferred to the IEPF?

Yes, shareholders (or their legal heirs) can claim a refund of dividend (and corresponding shares) transferred to the IEPF by filing an online application in Form IEPF-5, along with supporting documents, through the dedicated IEPF portal.

Q4. Is an interim dividend the same as a final dividend?

No, an interim dividend is declared by the Board during the financial year without needing shareholder approval, while a final dividend is recommended by the Board but must be formally declared by shareholders at the AGM.

Q5. Can a company declare dividend on preference shares even in a loss-making year?

Preference dividend, being a preferential right, is generally paid before any equity dividend and only out of available distributable profits/free reserves as per the same overall sourcing rules under Section 123; a company cannot declare any dividend (preference or equity) without adequate profits or eligible reserves.

Q6. Is there a maximum dividend rate a company can declare?

There is no statutory cap on dividend rate as long as it is declared from permissible sources and complies with the applicable rules; the practical limit is the company's available distributable profits and reserves.

Q7. Can shareholders demand a dividend if the company chooses not to declare one?

No, declaring dividend is discretionary — the Board recommends and shareholders approve, but neither is obligated to declare a dividend even if the company is profitable, since retained earnings may be needed for business growth or other purposes.

Dividend rules under the Companies Act, 2013 balance shareholders' expectation of returns with the company's need to preserve capital and honour creditor obligations. Companies should track the 30-day payment deadline and unpaid dividend transfer timelines carefully, since directors can face personal criminal liability for delayed dividend payment.