Corporate and Other Laws · Declaration and Payment of Dividend

Interim Dividend and Dividend Payment Rules

Updated 4 October 2026 · Fact-checked

Interim dividend is a dividend the Board declares during a financial year, or before the AGM, out of specified profits. Once any dividend is declared, deposit it in a separate scheduled bank account within 5 days, pay only the registered shareholder, and pay or post it within 30 days (section 127).

Understand Interim Dividend and Dividend Payment Rules

A dividend is the part of a company's profit that it distributes to its shareholders. Normally the company declares a final dividend at the AGM, on the Board's recommendation. But the Board does not always have to wait for the AGM. Section 123(3) lets the Board declare an interim dividend on its own.

The Board may declare it during any financial year, or at any time from the close of the financial year until the AGM is held. It can be paid out of three sources: the surplus in the profit and loss account, the profits of the financial year for which the interim dividend is sought, or the profits generated in the financial year up to the quarter before the date of declaration.

There is one safeguard. If the company has incurred a loss in the current financial year up to the end of the quarter just before the date of declaration, the interim dividend cannot be declared at a rate higher than the average dividend rate of the immediately preceding three financial years.

Payment rules apply to every dividend, interim or final. The amount must be deposited in a scheduled bank in a separate account within five days of declaration. It is paid only to the registered shareholder, or to his order or banker, and only in cash. Cash payment may be made by cheque, warrant or any electronic mode. Section 126 says that where a transfer instrument has been delivered but the transfer is not registered, the dividend goes to the Unpaid Dividend Account, unless the registered holder authorises payment to the transferee in writing.

Section 127 sets the deadline. If a declared dividend is not paid, or the warrant not posted, within 30 days of declaration, directors who are knowingly a party to the default face imprisonment up to two years and a fine of at least ₹1,000 per day of default. The company must also pay simple interest at 18% per annum for the period of default.

Key rules to remember

Interim dividend power: Board of Directors may declare interim dividend during the financial year, or between year-end and the AGM; Section 123(3). It is the Board's power, so no general meeting resolution is needed. The final dividend, by contrast, is declared at the AGM on the Board's recommendation.
Sources of interim dividend: Surplus in P&L account OR profits of the financial year OR profits till the quarter preceding the date of declaration; Any of the three. Unrealised gains, notional gains and revaluation gains are excluded from profits under the proviso to section 123(1).
Loss-making company limit: If loss up to the preceding quarter end: interim dividend rate ≤ average dividend rate of the immediately preceding 3 financial years; This is a cap on the rate, not a ban.
Deposit of dividend: Deposit in a separate account in a scheduled bank within 5 days of declaration; Section 123(4). Applies to final and interim dividend.
Who receives and how: Registered shareholder, or his order, or his banker; in cash (cheque, warrant or electronic mode); Section 123(5). Bonus shares by capitalisation of profits are permitted by the proviso.
Payment deadline and penalty: Pay or post within 30 days of declaration. Default: directors knowingly party – imprisonment up to 2 years and fine ≥ ₹1,000 per day; company – simple interest at 18% p.a.; Section 127. Five exceptions, such as legal prohibition, dispute over the right to receive, or lawful set-off against sums due from the shareholder.
Transfer pending registration: Transfer delivered but not registered: dividend goes to the Unpaid Dividend Account, unless registered holder authorises transferee in writing; Section 126. Rights shares and bonus shares are also held in abeyance.

How to solve Interim Dividend and Dividend Payment Rules questions

Use this order for any question on interim dividend or dividend payment. It keeps your answer in provision, facts, conclusion form.

1Identify what is asked: declaration of interim dividend, entitlement of a person, mode or timing of payment, or penalty for default.
2State the relevant rule in plain words and give the section: 123(3) for interim dividend, 123(4) and (5) for deposit and payment, 126 for pending transfers, 127 for the 30-day limit.
3For interim dividend, check who declares (Board), when (during the year or before the AGM) and from which source of profit.
4Check for a loss up to the preceding quarter end. If there is one, compare the proposed rate with the average rate of the last three financial years.
5For entitlement, check who is the registered shareholder and whether a transfer instrument was delivered but not registered.
6For timing, count 5 days for the bank deposit and 30 days for payment or posting, both from the date of declaration.
7If there is a default, check the exceptions in section 127 before applying the penalty.
8Write a one-line conclusion that answers the exact question asked.

Quickest way: Number and trigger scan

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

Match the number to the rule: 5 days is the bank deposit, 30 days is payment or posting, 3 years is the average rate for a loss-making company, 18% is interest, 2 years is the maximum imprisonment, ₹1,000 is the minimum daily fine.
In MCQs, eliminate options that say a dividend can be paid to a transferee without registration, unless the registered holder has authorised it in writing.
Eliminate options saying shareholders must approve an interim dividend. The Board alone declares it.
For written answers, use three lines: Provision (section and rule), Facts (apply the numbers from the question), Conclusion (state the result).
Always check the section 127 exceptions before writing that the directors are liable.

Common mistakes in Interim Dividend and Dividend Payment Rules

Saying shareholders must approve an interim dividend at a general meeting.
Students mix it up with the final dividend, which is declared at the AGM.
Fix: Remember that section 123(3) gives the power to the Board of Directors. The final dividend is declared at the AGM on the Board's recommendation.
Confusing the 5-day and 30-day periods.
Both run from the date of declaration and both concern payment.
Fix: Link 5 days with depositing the amount in a separate scheduled bank account. Link 30 days with paying the shareholder or posting the warrant.
Treating the loss-making company rule as a complete ban on interim dividend.
The word 'loss' suggests nothing can be paid.
Fix: The proviso only caps the rate at the average of the preceding three financial years. A dividend within the cap is allowed.
Paying dividend to the buyer of shares whose transfer is not yet registered.
Students think the real owner should get it.
Fix: Dividend goes to the registered shareholder. Under section 126, if the transfer is unregistered, it goes to the Unpaid Dividend Account unless the registered holder authorises the transferee in writing.
Applying the section 127 penalty without checking the exceptions.
Students stop at the 30-day rule.
Fix: No offence is deemed committed where, for example, a law prevents payment, there is a dispute about the right to receive, or the amount is lawfully adjusted against a sum due from the shareholder.
Writing that dividend may be paid in kind or by any means.
Students forget the 'cash only' rule.
Fix: Dividend is payable only in cash, by cheque, warrant or electronic mode. Issue of bonus shares by capitalisation is a separate permitted act.

Worked examples

Example 1

X Ltd's Board wants to declare an interim dividend of 18% for the current year. The company has incurred a loss up to the end of the quarter just before the date of declaration. Dividends declared in the last three financial years were 10%, 14% and 12%. Advise whether the Board can declare it.

Show the solution

Provision: Under section 123(3), the Board may declare an interim dividend. If the company has incurred a loss in the current year up to the end of the quarter immediately preceding the declaration date, the rate cannot be higher than the average dividend rate of the preceding three financial years.
Facts: There is a loss up to the preceding quarter end, so the cap applies.
Average rate = (10 + 14 + 12) ÷ 3 = 36 ÷ 3 = 12%.
Compare: the proposed rate of 18% is higher than 12%.
Conclusion: The Board cannot declare 18%. It may declare an interim dividend of up to 12%.

Answer: The Board cannot declare 18%. The maximum permissible rate is 12%, the average of the last three years.

Example 2

Y Ltd declared a dividend on 1 March. By 10 April, a shareholder A had not received it. There is no dispute about A's right, no legal bar, and no sum due from A. The facts do not say whether any director knowingly allowed the default. Separately, B sold shares to C. The transfer instrument was delivered to the company, but the transfer is not registered, and B has given no written authority. Explain the position of the company and the directors, and say who gets B's dividend.

Show the solution

Provision for A: Under section 127, a declared dividend must be paid, or the warrant posted, within 30 days of declaration.
Facts: 30 days from 1 March end on 31 March. The default therefore begins after 31 March, that is, from 1 April. By 10 April, 40 days have passed since declaration, so the 30-day limit is breached, and the default has run for 10 days (1 to 10 April). None of the exceptions applies.
Consequence for the company: Y Ltd must pay simple interest at 18% per annum for the period of default.
Consequence for directors: A director is punishable with imprisonment up to two years and a fine of at least ₹1,000 for every day of default only if he is knowingly a party to the default. The facts do not establish this, so liability attaches only to those directors shown to be knowingly involved.
Provision for B and C: Under section 126, where a transfer instrument is delivered but the transfer is not registered, the company must transfer the dividend to the Unpaid Dividend Account, unless the registered holder authorises payment to the transferee in writing.
Facts: B is still the registered holder and has given no written authority.
Conclusion: The dividend on those shares goes to the Unpaid Dividend Account, not to C.

Answer: Y Ltd is in default under section 127 from 1 April and owes 18% simple interest for the period of default. Only directors shown to be knowingly a party to the default face imprisonment and a minimum daily fine of ₹1,000. B's dividend goes to the Unpaid Dividend Account under section 126.

Exam tips

Learn the numbers as a set: 5 days, 30 days, 3 years, 18%, 2 years, ₹1,000. Examiners test them in MCQs.
In a loss-making company question, always compute the three-year average first, then compare it with the proposed rate.
For section 126 questions, look for the words 'transfer delivered but not registered' and 'written authority'. These decide the answer.
In section 127 problems, scan the facts for dispute, legal bar or set-off before concluding that an offence is committed. Also check whether the directors were knowingly a party to the default.
Write answers as Provision, Facts, Conclusion and quote the section number only when you are sure of it.

Practice questions from Declaration and Payment of Dividend

Interim Dividend and Dividend Payment Rules in other exams

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

CFA Level IIForms of Dividends and Dividend Payment Chronology

Interim Dividend and Dividend Payment Rules: frequently asked questions

Who can declare an interim dividend?

The Board of Directors can declare it under section 123(3). It may do so during a financial year, or at any time between the end of the financial year and the AGM. It does not need a general meeting resolution.

Within how many days must dividend be paid?

Dividend must be paid, or the warrant posted, within 30 days of declaration under section 127. Separately, the amount must be deposited in a separate scheduled bank account within 5 days of declaration under section 123(4).

What is the penalty for not paying dividend in time?

Every director who is knowingly a party to the default is punishable with imprisonment up to two years and a fine of at least ₹1,000 for every day of default. The company must also pay simple interest at 18% per annum during the default. No offence is deemed committed in the cases listed in the provisos, such as a dispute over the right to receive.

Can dividend be paid in cash only?

Yes. Section 123(5) says dividend is payable only in cash. It may be paid by cheque, warrant or any electronic mode. Capitalising profits to issue fully paid-up bonus shares is a separate act the section does not prohibit.

Who is entitled to receive the dividend?

The registered shareholder, or his order or his banker. If a transfer instrument has been delivered but not registered, section 126 requires the dividend to go to the Unpaid Dividend Account, unless the registered holder authorises the transferee in writing.