Corporate and Other Laws · Accounts of Companies

Dividend and Transfer to Reserves under the Companies Act, 2013

Updated 4 October 2026 · Fact-checked

Dividend is a company's profit share paid to shareholders. Section 123 lets a company declare it only from current profits after depreciation, undistributed past profits, or government money under a guarantee. Unpaid dividend moves to the Unpaid Dividend Account (Section 124), then to the IEPF (Section 125). Answer by naming the source, condition, time limit and consequence.

Understand Dividend and Transfer to Reserves

A dividend is the part of a company's profit that it pays to its shareholders. The Companies Act, 2013 does not let a company pay it freely. The law protects creditors and the company's capital by controlling where the money can come from.

Under Section 123(1), dividend can be declared or paid only out of: (a) profits of the current year after providing depreciation as per Schedule II; (b) undistributed profits of earlier years, again after depreciation; (c) both; or (d) money provided by the Central or a State Government under a guarantee for paying dividend. Unrealised gains, notional gains, revaluation of assets and fair value changes in carrying amounts must be excluded when computing profits.

Before declaring dividend, a company may transfer any percentage of that year's profits to reserves, as it considers appropriate. If profits are inadequate or absent, it may pay dividend from accumulated profits earlier transferred to free reserves, but only as per the prescribed rules. No dividend can come from reserves other than free reserves. Also, no dividend can be declared unless carried-over previous losses and depreciation not provided in earlier years are set off against the current year's profit.

The Board may declare an interim dividend during the year, or between the year-end and the AGM. It can come from the surplus in the profit and loss account, the profits of the year, or profits generated up to the quarter before the declaration date. If the company has a loss up to the end of that preceding quarter, the interim dividend rate cannot be higher than the average dividend rate of the three preceding financial years.

After declaration, the money must be deposited in a separate account in a scheduled bank within five days. If it stays unpaid or unclaimed for 30 days, it goes to the Unpaid Dividend Account within a further seven days. After seven years there, it goes to the Investor Education and Protection Fund (IEPF). Shares on which dividend is unpaid or unclaimed for seven consecutive years are also transferred to the IEPF.

Key rules to remember

Sources of dividend (Section 123(1)): Current year profit (after depreciation) OR undistributed past profit (after depreciation) OR both OR Government money under guarantee; Exclude unrealised gains, notional gains, revaluation and fair value changes from profits.
Dividend from accumulated profits: Allowed only from past profits transferred to free reserves, and only as per prescribed rules; Applies when profits of the year are inadequate or absent. Reserves other than free reserves cannot be used.
Set-off condition: Previous losses and unprovided depreciation must be set off against current year profit before declaring dividend; This is the last proviso to Section 123(1).
Interim dividend limit (Section 123(3)): If loss up to the preceding quarter: interim dividend rate ≤ average dividend rate of the immediately preceding 3 financial years; The Board declares interim dividend, not the members.
Deposit of dividend (Section 123(4)): Separate scheduled bank account within 5 days of declaration; Applies to final and interim dividend.
Mode of payment (Section 123(5)): Only to the registered shareholder, or to his order or banker; cash, cheque, warrant or electronic mode; Bonus shares by capitalising profits or reserves are not prohibited.
Unpaid Dividend Account (Section 124(1)): Unpaid or unclaimed for 30 days → transfer within 7 days after those 30 days; Account is opened in a scheduled bank.
Statement of unpaid dividend (Section 124(2)): Within 90 days of transfer, place names, last known addresses and amounts on the company website; Also on any website approved by the Central Government.
Interest on default (Section 124(3)): 12% per annum on the amount not transferred, from the date of default; Interest benefits the members in proportion to the amount unpaid to them.
Transfer to IEPF (Section 124(5) and (6)): Money: unpaid 7 years from transfer. Shares: dividend unpaid or unclaimed for 7 consecutive years or more; If dividend is paid or claimed in any year in the 7-year period, the shares are not transferred.
Penalty (Section 124(7)): Company: ₹5,00,000 to ₹25,00,000. Officer in default: ₹1,00,000 to ₹5,00,000; Fine amounts are minimum and maximum.
Section 123(6) bar: Failure to comply with Sections 73 and 74 → no dividend on equity shares while failure continues; Sections 73 and 74 deal with deposits.
Pending transfer (Section 126): Transfer instrument delivered but not registered → dividend goes to Unpaid Dividend Account, unless registered holder authorises payment to the transferee in writing; Rights shares and bonus shares for those shares are kept in abeyance.

How to solve Dividend and Transfer to Reserves questions

Dividend questions test whether you can match facts to the right rule. Use the same sequence each time.

1Identify the type of dividend: final (declared at the AGM), interim (declared by the Board), or unpaid dividend.
2List the source of funds in the question: current profit, past profit, free reserves, revaluation surplus, or Government money.
3Test the source against Section 123(1). Exclude unrealised and notional gains, revaluation and fair value changes. Check depreciation has been provided as per Schedule II.
4Check the set-off condition: have previous losses and unprovided depreciation been set off against the current year's profit?
5If profits are inadequate, check that dividend is from free reserves only and as per the prescribed rules. For interim dividend, check whether a loss exists up to the preceding quarter and compare the rate with the three-year average.
6Apply the time limits: 5 days for the separate bank account, 30 days then 7 days for the Unpaid Dividend Account, 90 days for the statement, 7 years for IEPF.
7Check payment rules: registered shareholder, mode of payment, and any pending transfer under Section 126.
8Write the conclusion with the consequence: permitted or not, and the interest or penalty if there is a default.

Quickest way: Source, Time, Penalty

When to use it: Use this for MCQs and for short written answers when time is tight.

MCQ: look for the trap word. 'Revaluation', 'unrealised', 'reserves other than free reserves' usually mean dividend is not allowed from that source.
MCQ: match the number to the section. 5 days is deposit, 30 days and 7 days is Unpaid Dividend Account, 90 days is the website statement, 7 years is IEPF, 12% is interest.
MCQ: for an interim dividend with a loss, compare the proposed rate with the average of the preceding three years. The rate must not be higher.
Written: use four lines. Provision (cite the section), Facts (apply numbers), Conclusion, Consequence.
Written: show the profit working in a small table-like list with each deduction on its own line. Step marks are given for each line.
Always state the section number next to each rule, but only if you are sure of it.

Common mistakes in Dividend and Transfer to Reserves

Including revaluation surplus or unrealised gains in profits available for dividend.
Students see the amount in the balance sheet and treat it as profit.
Fix: Remember the proviso to Section 123(1)(a): unrealised gains, notional gains, revaluation and fair value changes are excluded from the profit computation.
Paying dividend out of any reserve, including capital reserve or securities premium.
Students confuse 'reserves' with 'free reserves'.
Fix: The Act says no dividend from reserves other than free reserves. Even from free reserves, dividend is allowed only as per the prescribed rules.
Forgetting to set off previous losses and unprovided depreciation.
Students look only at the current year's profit after depreciation.
Fix: Add the set-off check as a separate step. Dividend cannot be declared unless these are set off against the current year's profit.
Mixing up the time limits in Section 123 and Section 124.
Many numbers (5, 7, 30, 90) look similar.
Fix: Link each number to its action: 5 days to deposit in a separate bank account; 30 days of non-payment, then 7 days to transfer; 90 days for the statement; 7 years to IEPF.
Saying the shareholders declare interim dividend.
Students link all dividends to the AGM.
Fix: Section 123(3) gives the power to the Board of Directors. It can be declared during the year or from year-end up to the AGM.
Applying the three-year average rule whenever interim dividend is declared.
Students overstate the proviso.
Fix: The cap applies only if the company has incurred a loss up to the end of the quarter immediately preceding the declaration date.

Worked examples

Example 1

The Board of Beta Ltd. wants to declare an interim dividend. The company incurred a loss up to the end of the quarter preceding the date of declaration. Dividends declared in the three preceding financial years were 10%, 12% and 8%. The Board proposes 12%. Can it do so?

Show the solution

Provision: Section 123(3) allows the Board to declare interim dividend. The proviso says if the company has incurred a loss up to the end of the quarter immediately preceding the declaration date, the interim dividend cannot be at a rate higher than the average dividends declared in the immediately preceding three financial years.
Facts: There is a loss up to the preceding quarter, so the cap applies.
Working: Average rate = (10% + 12% + 8%) ÷ 3 = 30% ÷ 3 = 10%.
Comparison: Proposed rate 12% is higher than 10%.
Conclusion: The Board cannot declare 12%. It can declare an interim dividend of up to 10%.

Answer: No. The maximum permitted interim dividend is 10%, the average of the preceding three years, because the company has a loss up to the preceding quarter.

Example 2

Gamma Ltd. declared a dividend on 1 September. The dividend of ₹4,00,000 remained unpaid to some shareholders. State the time-limits and steps the company must follow, and what happens if it fails to transfer the amount.

Show the solution

Provision: Section 124(1) applies when dividend is declared but not paid or claimed within 30 days from the declaration date.
Step 1: After the 30 days expire, the company must within 7 days transfer the total unpaid or unclaimed amount to the Unpaid Dividend Account, a special account in a scheduled bank.
Step 2: Under Section 124(2), within 90 days of making the transfer the company must prepare a statement of names, last known addresses and unpaid amounts, and place it on its website, if any, and on the website approved by the Central Government.
Step 3: A person claiming the money may apply to the company for payment (Section 124(4)).
Step 4: If the money remains unpaid or unclaimed for 7 years from the date of transfer, the company must transfer it with accrued interest to the IEPF under Section 125, and send the prescribed statement to the authority.
Default: Under Section 124(3), the company pays interest at 12% per annum from the date of default on the amount not transferred. This interest benefits the members in proportion to the amount unpaid to them. Under Section 124(7), the company is also punishable with a fine of ₹5,00,000 to ₹25,00,000, and each officer in default with a fine of ₹1,00,000 to ₹5,00,000.
Also, shares on which dividend has not been paid or claimed for 7 consecutive years or more are transferred to the IEPF in its name.

Answer: The company must transfer ₹4,00,000 (or the unpaid part) to the Unpaid Dividend Account within 7 days after the 30-day period, publish the statement within 90 days, and send the money to the IEPF after 7 years. On default it pays 12% interest per annum, and fines apply under Section 124(7).

Exam tips

Learn the numbers as a set: 5 days, 30 days, 7 days, 90 days, 7 years, 12%. Most MCQs test one of them.
In case-study questions, check the source of funds first. Revaluation surplus, unrealised gains and non-free reserves are common traps.
For the interim dividend cap, calculate the simple average of the three prior years' rates and compare it with the proposed rate. Do it only if there is a loss up to the preceding quarter.
Use the provision-facts-conclusion format and cite Sections 123, 124, 125 or 126 against each rule to earn step marks.
Remember Section 126: if a transfer is pending registration, dividend goes to the Unpaid Dividend Account unless the registered holder authorises payment to the transferee in writing.

Practice questions from Accounts of Companies

Dividend and Transfer to Reserves in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Dividend and Transfer to Reserves: frequently asked questions

Can a company pay dividend out of revaluation reserve?

No. Section 123(1)(a) says that in computing profits, unrealised gains, notional gains, revaluation of assets and fair value changes in carrying amounts must be excluded. Also, only free reserves can be used, and then only as per the prescribed rules.

Who declares interim dividend and when?

The Board of Directors declares it under Section 123(3). It can be declared during any financial year, or at any time between the closure of the financial year and the AGM. It may be paid from the surplus in the profit and loss account, the profits of the year, or profits generated up to the quarter before the declaration date.

What happens to dividend that is not claimed?

If unpaid or unclaimed for 30 days, the company transfers it within 7 days to the Unpaid Dividend Account. If it stays unpaid or unclaimed for 7 years from the transfer, it goes to the IEPF with interest. Shares with no dividend paid or claimed for 7 consecutive years are also transferred to the IEPF.

Is dividend allowed in cash only?

Section 123(5) says dividend is not payable except in cash, but it also allows payment by cheque, warrant or any electronic mode. Capitalising profits or reserves to issue fully paid-up bonus shares or to pay up unpaid amounts on shares is not prohibited. Payment goes only to the registered shareholder, his order or his banker.