A Complete Guide to Interim and Final Dividends: Legal, Tax and Accounting Aspects
A dividend is a portion of a company's profit distributed to its shareholders,
Dividends can be:
1. Interim (during the year) or
2. Final (at year-end)
1. Interim Dividend
The interim dividend is declared by Board of directors (BOD) at the board meeting. It can be paid more than once in a financial year.
Sources of interim dividend
a) out of surplus in the profit and loss account
b) out of profit of the financial year in which such interim dividend is sought to be declared
c) profits generated by the Company till the quarter preceding the date of declaration of interim dividend*
*If a company has incurred losses during the current financial year up to the end of the quarter immediately preceding the date of declaration, the interim dividend should not exceed the average rate of dividends declared by the company during the three immediately preceding financial years.
For example, BOD declared interim dividend @12% at the board meeting on 12 July 2025 and the company have incurred loss during the previous quarter (April-June) and the dividend declared by company during previous three financial years is:
2023-24 - 14%
2022-23 - 0%
2021-22 - 15%
The rate of rate of interim dividend in FY 2024-25 shall not shall not exceed 14.5% (14%+15%/2) the interim dividend declared by BOD Is valid
2. Final dividend
The board of directors (BOD) recommend the dividend at the Annual general meeting(AGM) after reviewing the company’s financial performance and it is approved by Shareholders of the company, once the shareholders approve it through are solution, the dividend is formally declared and it becomes a liability of the company.
Sources of dividend Final dividend
As per Section 123 of the companies’ act, 2013 a company can only declare or pay dividends from three main sources:
a. Profit of current financial year or;
b. Profit or profits of previous financial year(s)or;
c. Both or;
d. Money received from central or state government or;
e. Out of free reserves*
*Incase of Absence or inadequacy of profit in any financial year a company may declare dividend out of its free reserves subject to following condition:
a. Rate of dividend: The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the 3 years immediately preceding that year.
For example, the last three dividend declared by company is
2022-23 - 14%
2021-22 - 0%
2020-21 - 15%
The rate of dividend in FY 2023-24 shall not be more than 14.5% (14%+15%/2)
Note: This rule shall not apply to a company which has not declared any dividend in immediately preceding 3 financial years.
b. Total withdrawal from accumulated profits: The total amount to be drawn from such accumulated profits shall not exceed 1/10 of the sum of its paid-up share capital and free reserves as per the latest audited financial statement.
For example, the total paid up share capital is ₹50Lakhs and free reserve are ₹25Lakhs
The amount withdrawn from accumulated profits shall not be more than ₹7.5Lakhs (Paid up share capital INR50Lakhs+Free reserves INR 25 lakhs*1/10)
c. Setting off the losses: The amount so drawn shall first be utilized to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared.
For example, if the company has incurred a loss of INR 2 lakhs and the opening balance of its retained earnings is INR 7.5 lakhs, such loss is required to be first set off against the retained earnings. Accordingly, the balance available for declaration of dividend would be INR 5.5 lakhs only.
d. To maintain reserve: The balance of reserves after withdrawal shall not fall below 15% of its paid-up share capital as per the latest audited financial statement.
For example, after withdrawal from accumulated profits the balance of free reserves shall not fall bellow INR 7.5 Lakhs (Paid up share capital INR 50Lakhs*15%).
e. Dividend to be declared only from free reserves: No dividend shall be declared or paid by a company from its reserves other than free reserves.
When calculating profit, the company shall not include certain gains such as
i. Unrealised gains (Profit is not yet received in cash)
ii. Revaluation reserve
iii. Change in value of assets or liabilities based on current market value
Declaration of dividend Process
After declaration there are three possibilities:
1. Company pays and shareholder claims the dividend or
2. Company pays dividend but shareholder fails to claim or
3. Company fails to pay dividend.
1. Company pays and shareholder claims the dividend
The company to deposit the amount of dividend in a separate bank account in a scheduled bank within 5 days from the date of its declaration and in next 25 days company to pays the dividend.
2. Company pays dividend but shareholder fails to claim
a. In case dividend has been declared by a company but has not been paid to or claimed by any shareholder entitled to the payment of the dividend within 30 days from the date of declaration, the company shall within 7 days from the date of expiry of the said period of 30 days, transfer the total amount of dividend which remains unpaid or unclaimed to a special bank account to be opened by the company in that behalf in any scheduled bank to becalled "Unpaid Dividend Account (UDA)”
b. The company shall, within a period of 90 days of making any transfer of an amount to the Unpaid Dividend Account (UDA),prepare a statement containing the names, their last known addresses and the unpaid dividend to be paid to each person and place it on the web-site of the company, if any, and also on any other web-site approved by the Central Government.
c. Any money transferred to the Unpaid Dividend Account of a company which remains unpaid or unclaimed for a period of seven years from the date of such transfer (7 years and 38th day) shall be transferred by the company along with interest accrued, if any, thereon to the Investor Education and Protection Fund (IEPF)*
Even after 7 years, shareholders can make a claim of dividend by following the prescribed procedure at IEPF website.
*The Central Government has established an Investor Education and Protection Fund for the purpose to educate investors and to protect the interest of investors
3.Company fails to pay dividend
As per Section 127 of the companies’ act, 2013 When a dividend has been declared by a company but has not been paid within 30 days from the date of declaration to any shareholder entitled to the payment of the dividend
i. Every director of the company shall, if he is knowingly a party so the default, be punishable with imprisonment which may extend to 2 years and with fine which shall not be less than Rs.1000/- for every day during which such default continues and;
ii. The company shall be liable to pay simple interest at the rate of 18% per annum during the period for which such default continues.
Provision to section 127 has provided a list where no offence under this section shall be deemed to have been committed:
a) where the dividend could not be paid by reason of the operation of any law or
b) where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him; or
c) where there is a dispute regarding the right to receive the dividend; or
d) where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
e) Any other reason where the company is not in default
Taxation of Dividend
Pre finance act, 2020 Companies paying dividends were required to pay Dividend Distribution Tax (DDT) on the dividends distributed. However, as of the Finance Act, 2020, the DDT was abolished and dividends are now taxable in the hands of the shareholders, dividend income is taxed under the head 'Income from Other Sources', regardless of whether shareholders hold shares as stock-in-trade or investments and the only deduction allowed against dividend income is for interest expenses incurred in relation to earning the dividend. The deduction is limited to 20% of the dividend income.
a. Any company paying dividends to its shareholders is required to deduct TDS at the rate 10%if the amount is more than INR5,000 as per section 393 of the income tax act, 2025
b. Any Indian company paying dividend to a non-resident Indian (NRI) is required to deduct TDS rate is 20% of the income tax act, 2025
Accounting of dividend
When a dividend is declared, a liability is recorded by debiting Free reserves or profits in case maybe and crediting a liability dividend payable under the head current liabilities, upon payment, the liability is settled by debiting dividend payable and crediting cash or bank accounts.
Unpaid dividends are recorded under the head ‘Other Current Liabilities’ as the company continues to have an obligation to pay such amount; however, where the financial statements are prepared in accordance with Ind AS, the same should generally be classified under ‘Other Financial Liabilities’ .Further, details relating to unpaid dividends are often disclosed in the notes to accounts, including the total amount of unclaimed dividends, the period for which such amounts have remained unpaid, and any steps taken by the company in relation thereto.
Dividend declared and not paid to the shareholders within specified time limit and which is required to be transferred to specified fund will be considered as a statutory due and required to be reported under clause (vii) of paragraph of CARO 2020
Authors
CA Aakash Mehta | Partner
Sunil Suthar | Consultant
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