Corporate and Other Laws · Declaration and Payment of Dividend

Meaning and Provisions of Dividend under the Companies Act, 2013

Updated 4 October 2026 · Fact-checked

Dividend is the share of a company's profits paid to its shareholders. Section 2(35) says it includes any interim dividend. Section 123 allows it from current-year profits and accumulated profits after depreciation, with reserves only as a conditional exception. To solve questions, identify the source, who declares it (Board or members), and the conditions met.

Understand Meaning and Provisions of Dividend under Companies Act

A dividend is the return a company pays to its shareholders out of its profits. The shareholder does not get it as a right every year. The company must first have lawful profits, and then the right body must declare it.

The Act defines it in a very short way. Section 2(35) says: "dividend" includes any interim dividend. So the word covers both a dividend declared at the end of the year and one declared during the year.

There are two kinds you must separate. A final dividend is recommended by the Board and then declared by the members at the general meeting. The members cannot raise it above what the Board recommended. An interim dividend is declared by the Board, without waiting for the members. The Board may declare it during any financial year, or at any time from the close of the financial year till the holding of the annual general meeting. It may be declared out of the surplus in the profit and loss account and out of the profits of the financial year for which the interim dividend is sought to be declared.

Section 123 is the main rule on declaring and paying dividend. The normal sources are: profits of the current year after providing for depreciation, accumulated profits of earlier years after providing for depreciation, both together, or money provided by the Central or a State Government to pay dividend under a guarantee. Previous losses and unprovided depreciation must be set off against current-year profit first.

There is one exception. When the company has no profit or inadequate profit, dividend may be declared out of free reserves (previous years' profits transferred to reserves). This is allowed only under the proviso to Section 123 and the Companies (Declaration and Payment of Dividend) Rules, 2014, and only if their conditions are met. Capital and securities premium are not sources of dividend.

Dividend is paid in cash, by cheque, warrant, or in any electronic mode to the registered shareholder (or to the person entitled or his banker). Issuing bonus shares is not a dividend payment. Once declared, dividend must be paid within 30 days, and amounts left unpaid go to a special Unpaid Dividend Account. Those later rules are covered in related topics.

Key rules to remember

Definition of dividend: Dividend includes any interim dividend (Section 2(35)); Use this line when a question asks whether interim dividend is also a dividend. Yes, it is.
Permitted sources of dividend (Section 123): Current-year profit after depreciation | accumulated profit of earlier years after depreciation | both | Government money provided under a guarantee. Exception: free reserves (previous years' profits), only under the proviso and the Rules; Capital and securities premium are not lawful sources. Previous losses and unprovided depreciation are set off against current profit first. Reserves can be used only when the proviso conditions are met.
Who declares: Final dividend: members at the general meeting, on Board's recommendation | Interim dividend: Board; Members can reduce the recommended final dividend but cannot increase it. The Board may declare interim dividend during any financial year or at any time from the close of the financial year till the AGM, out of the surplus in the profit and loss account and out of the profits of the financial year for which it is sought to be declared.
Declaring dividend out of reserves (previous years' profits) when there is no profit or inadequate profit: conditions: Rate ≤ average of the rates in the 3 preceding years | Amount drawn ≤ 10% of (paid-up capital + free reserves) | Reserves left ≥ 15% of paid-up capital; These come from the Companies (Declaration and Payment of Dividend) Rules, 2014. The maximum drawal is the lower of 10% of (paid-up capital + free reserves) and the amount that leaves reserves at 15% of paid-up capital. The amount drawn from reserves must first be utilised to set off the loss of the current financial year, so the amount available for dividend is the drawal less that loss. All figures are as per the latest audited balance sheet.
Interim dividend when the company has losses: If the company has incurred a loss in the current financial year up to the end of the quarter immediately preceding the date of declaration of the interim dividend, the interim dividend rate ≤ average dividend rate of the last 3 financial years; Check the loss position up to the last completed quarter before the Board declares an interim dividend.
Payment timeline: Pay within 30 days of declaration | Dividend amount (including interim dividend) deposited in a separate account in a scheduled bank within 5 days of declaration (Section 123(4)); Unpaid or unclaimed amounts go to the Unpaid Dividend Account within 7 days after the 30 days end (Section 124).

How to solve Meaning and Provisions of Dividend under Companies Act questions

Use the same order for any dividend question. It keeps your answer in the provision, facts, conclusion format that earns step marks.

1Identify the type: interim (Board, during the year or between year-end and the AGM) or final (members, at the general meeting on Board's recommendation).
2State the law in one line: Section 2(35) defines dividend as including interim dividend, and Section 123 controls the sources and conditions.
3Check the source of funds: current-year profit after depreciation, accumulated profit after depreciation, both, or Government money under a guarantee. For an interim dividend, the Board may use the surplus in the profit and loss account and the profits of the financial year for which it is declared.
4Set off previous losses and unprovided depreciation against current-year profit before any dividend is declared.
5If the company has no profit or inadequate profit and proposes to use reserves, test the three conditions: rate cap, 10% cap on the amount drawn, and 15% floor on the reserves left. The maximum drawal is the lower of the 10% cap and the amount that keeps reserves at the 15% floor. The amount drawn must first be utilised to set off the loss of the current financial year, and only the balance can go to dividend.
6If it is an interim dividend and the company has incurred a loss in the current financial year up to the end of the quarter immediately preceding the date of declaration, apply the average-rate cap of the last three financial years.
7Apply the timelines: 5 days to deposit the dividend amount (including interim dividend) in a separate scheduled bank account under Section 123(4), 30 days for payment, and 7 days after that for moving any unpaid amount to the Unpaid Dividend Account under Section 124.
8Write a clear conclusion: lawful or unlawful, and the maximum amount or rate if asked.

Quickest way: Source, Body, Limit, Date

When to use it: Use this in the exam hall for MCQs and for short written answers. It works for both 1-mark and 2-mark MCQs and for the 70-mark descriptive part.

MCQ: if an option says dividend can be paid out of capital or securities premium, eliminate it. Only the sources listed above are valid, plus reserves under the proviso conditions.
MCQ: if an option says members can increase the final dividend above the Board's recommendation, eliminate it.
MCQ on calculations: compute the 10% cap first. Then find the amount that leaves reserves at 15% of paid-up capital (reserves minus that floor). The maximum drawal is the lower of the two figures. Then deduct any current-year loss to get the amount available for dividend.
Written answer: use the format Provision (Section 2(35) or 123), Facts (apply the numbers), Conclusion (one line).
Always write the dates by counting days from the date of declaration. Show the counting, as this earns step marks.

Common mistakes in Meaning and Provisions of Dividend under Companies Act

Saying interim dividend is not a dividend because the members did not declare it.
Students link dividend only with the AGM.
Fix: Quote Section 2(35): dividend includes any interim dividend. The Board declares it, but it is still a dividend.
Paying dividend out of capital or securities premium.
Students think any large credit balance is available for distribution.
Fix: Remember the sources under Section 123: current-year profit, accumulated profit, both, and Government money under a guarantee. Reserves can be used only as an exception under the proviso and the Rules. Capital and securities premium are not among the sources.
Ignoring depreciation and past losses before declaring dividend.
Students look only at the profit figure given in the question.
Fix: Deduct depreciation first and set off previous losses and unprovided depreciation against current-year profit.
Applying the 10% cap on the paid-up capital alone.
The rule wording is rushed and the free reserves are forgotten.
Fix: The cap is 10% of paid-up capital plus free reserves, as per the latest audited balance sheet.
Treating the whole amount drawn from reserves as available for dividend.
Students forget that the drawal must first set off the current-year loss.
Fix: Find the maximum drawal, deduct the current-year loss, and treat only the balance as available for dividend.
Treating bonus shares as dividend payment.
Both are given to shareholders out of company funds.
Fix: Dividend is paid in cash, by cheque, warrant, or in any electronic mode to the registered shareholder (or to the person entitled or his banker). Bonus shares are a capitalisation of reserves and have separate rules.
Letting the members increase the final dividend at the AGM.
Students think members have full control as owners.
Fix: The Board recommends and the members may only approve or reduce. They cannot declare more than the Board recommended.

Worked examples

Example 1

A company has paid-up share capital of ₹50,00,000 and free reserves of ₹30,00,000 as per its latest audited balance sheet. It has no profit this year and wants to declare a dividend out of reserves. Dividend rates in the three preceding years were 12%, 14% and 10%. Find the maximum rate and the maximum amount that can be drawn from reserves, and state how much is available for dividend.

Show the solution

Provision: when dividend is declared out of reserves, the rate cannot exceed the average of the preceding three years, the amount drawn cannot exceed 10% of paid-up capital plus free reserves, and the reserves left must be at least 15% of paid-up capital. The amount drawn must first be utilised to set off the loss of the current financial year, and only the balance can be used for dividend.
Average rate = (12 + 14 + 10) ÷ 3 = 36 ÷ 3 = 12%.
Paid-up capital plus free reserves = ₹50,00,000 + ₹30,00,000 = ₹80,00,000.
10% cap on the amount drawn = 10% × ₹80,00,000 = ₹8,00,000.
Floor: 15% of paid-up capital = 15% × ₹50,00,000 = ₹7,50,000. The floor allows a drawal of up to ₹30,00,000 − ₹7,50,000 = ₹22,50,000.
Maximum drawal is the lower of ₹8,00,000 and ₹22,50,000, which is ₹8,00,000.
Check: reserves left after drawing = ₹30,00,000 − ₹8,00,000 = ₹22,00,000, which is more than ₹7,50,000, so the floor is met.
The question gives no current-year loss figure. So ₹8,00,000 is the maximum that can be drawn, not necessarily the amount payable as dividend. The amount available for dividend is ₹8,00,000 less the current-year loss to be set off. For example, with a loss of ₹3,00,000, only ₹5,00,000 would be available.
Conclusion: the 10% cap is the lower limit, so it is the binding one.

Answer: Maximum dividend rate is 12%. The maximum amount that can be drawn from reserves is ₹8,00,000, and the amount available for dividend is this figure less any current-year loss to be set off.

Example 2

The Board of X Ltd declared an interim dividend of ₹2 per share on 10,00,000 shares on 10 June. State who has the power to declare it, the amount to be kept aside, and the dates by which the money must be deposited and the dividend paid.

Show the solution

Provision: Section 2(35) says dividend includes any interim dividend, so it is covered by the dividend provisions. Under Section 123 the Board may declare interim dividend during any financial year, or at any time from the close of the financial year till the AGM, out of the surplus in the profit and loss account and out of the profits of the financial year for which it is declared.
Facts: the Board has declared it, so no general meeting approval is needed.
Total amount = ₹2 × 10,00,000 = ₹20,00,000.
Under Section 123(4), the dividend amount, including interim dividend, must be deposited in a separate account in a scheduled bank within 5 days of declaration, so by 15 June.
Payment must be made within 30 days of declaration. 10 June plus 30 days gives 10 July.
If any amount remains unpaid after the 30 days, it must be moved to the Unpaid Dividend Account within 7 days after the 30 days end (Section 124), so by 17 July.
Payment is made in cash, by cheque, warrant, or in any electronic mode to the registered shareholder (or to the person entitled or his banker).
Conclusion: the Board can validly declare it, provided the funds come from a permitted source. If the company had a loss in the current year up to the last quarter before declaration, the rate would also have to stay within the average of the last three years.

Answer: The Board declares it. ₹20,00,000 is deposited in a separate scheduled bank account by 15 June, payment is made by 10 July, and any unpaid amount goes to the Unpaid Dividend Account by 17 July.

Exam tips

In theory answers, begin with Section 2(35) and Section 123 in one line. Then give the facts and conclusion.
Learn the three conditions for paying dividend out of reserves as a set: rate, 10% cap, 15% floor. Numerical questions on them are common. Remember to deduct any current-year loss from the drawal.
For interim vs final dividend, write the answer as a two-column comparison in points: who declares, when, and the limit on the amount.
Do not skip small details like the mode of payment and registered holders. Many MCQs test them as a trap.
In MCQs there is no negative marking, so attempt every question. Eliminate any option that uses capital or securities premium as a source.

Practice questions from Declaration and Payment of Dividend

Meaning and Provisions of Dividend under Companies Act: frequently asked questions

What does Section 2(35) of the Companies Act, 2013 say about dividend?

It says that "dividend" includes any interim dividend. So an interim dividend declared by the Board during the year is also a dividend under the Act.

What is the difference between interim and final dividend?

A final dividend is declared by the members at the general meeting on the Board's recommendation, usually after the year ends. An interim dividend is declared by the Board, during the financial year or between the year-end and the AGM. Members cannot increase a final dividend above the Board's recommendation.

What does Section 123 deal with?

Section 123 deals with the declaration and payment of dividend. It lists the normal sources, such as current-year profit and accumulated profit after depreciation. It also allows dividend out of reserves as an exception, with conditions, and sets conditions for interim dividend.

Can a company pay dividend in the form of bonus shares?

No. Dividend is paid in cash, by cheque, warrant, or in any electronic mode to the registered shareholder (or to the person entitled or his banker). Bonus shares are issued by capitalising reserves and are governed by separate provisions.

Is this chapter important for the exam?

It is a regular source of MCQs and short written questions in Paper 2. Focus on the sources, the reserve conditions with calculations, and the payment timelines.