Distribution of dividend, returns and profit amongst shareholders in Pvt Ltd Co.
A Private Limited Company registration enables providing rewards to the shareholders of the company in the form of dividend distribution, returns and profits.
Dividend (also called return or profit) is the distribution of reward from a portion of company’s earnings and is paid to the persons holding shares of the company (i.e., the shareholders). It is a kind of return or profit to the shareholders for their investment in the company’s shares. From the total earnings of the company, some portion is distributed amongst shareholders.
Dividend can be Final dividend or Interim dividend. Final dividend is declared at the end of the financial year while Interim dividend is declared during the year.
In India, companies are governed by the Companies Act, 2013. Therefore, the process of dividend declaration and distribution amongst shareholders of a Private Company will be as per the Companies Act, 2013:
1. (a) In case of Final dividend, the Board of Directors of the company recommend the dividend and it is declared at an Annual General Meeting.
(b) In case of Interim dividend, the Board of Directors of the company declare the dividend.
2. The dividend shall be paid only out of profits earned (free reserves) by the company (either current year or undistributed profits of previous year/years) or out of money provided by the Central or State Government for this purpose.
Points to be noted for dividend distribution-
(a) Provide for depreciation before declaration of dividend out of profits;
(b) Set off previous year losses before declaration of dividend out of profits.
(c) Company may transfer any amount of profits to its reserves, before declaration of dividend, on the discretion of the Board of Directors.
(d) A company cannot pay a dividend to equity shareholders before payment of unpaid dividend, if any, to Preference shareholders.
A company can declare and distribute dividend amongst shareholders even if it has no profit or less profit, but only if it satisfies the below mentioned conditions:
(i) The rate of dividend should not be more than the average rate of dividend of last 3 years (not applicable on company which has not declared dividend in all the last 3 years);
(ii) The total amount withdrawn from profits should not be more than 1/10th of [Paid up share capital + Free reserves] of the company as per the latest audited financial statements;
(iii) At first, utilizes the amount withdrawn to set off any losses of the current year;
(iv) Maintains the balance of free reserves after withdrawal to a minimum of 15% of Paid up share capital of the company as per the latest audited financial statements.
Why do companies pay dividend in spite of no profits or less profits?
-To maintain their established track record of making regular dividend payments.
3. The dividend to be distributed amongst shareholders shall be deposited in a separate bank account opened for this purpose. It shall be deposited within 5 days from the date of its declaration. Further, it shall be paid within 30 days of declaration to the shareholders. Care must be taken of the fact that dividend shall be paid only to the registered shareholder entitled to dividend or to his/her order or to his/her banker.
(i) Dividend shall be paid in cash by cheque or warrant or electronic mode. Cheque or warrant shall be valid for 3 months.
(ii) The amount deposited in above mentioned account can’t be utilized for any purpose other than distribution as dividend.
(iii) Any amount due from the shareholders in relation to shares of the company can be adjusted against Dividend payable to shareholders.
4. The balance dividend in the account that remains unpaid or unclaimed shall be transferred to the Unpaid Dividend Account opened by the company. The amount shall be transferred to this account within 7 days after the completion of a period of 30 days of declaration.
In case of any default in transferring the unpaid or unclaimed amount within 7 days, interest at the rate of 12% shall be levied on so much of amount not transferred from the date of such default. Such interest shall be enured to the benefit of the shareholders in the proportion of amount remaining unpaid to them
Company may change the nomenclature of the account opened for depositing dividend to Unpaid dividend account after 30 days. But, it will have to open another account for depositing dividend declared in future.
5. The amount remaining unclaimed or unpaid (along with interest accrued, if any) in the Unpaid dividend account for a period of 7 years from the date of transfer of that amount in Unpaid dividend account shall be transferred to the Investor Education and Protection Fund (IEPF). This amount shall be transferred to IEPF within 30 days of expiry of 7 years.
(i) Company shall maintain the
(ii) Company shall intimate the shareholders whose unclaimed dividend is being transferred to IEPF, at least 3 months before the date of transfer.
6. A shareholder who wants to file refund claim for dividend transferred to IEPF shall download Form IEPF-5 from the IEPF website and submit it after filling in the details. After verification of the claim, IEPF releases the refund through e-payment.
Punishment in case of failure to distribute dividends to the shareholders within 30 days of the declaration of dividend:
(i) Every Director, who is knowingly party to the default- Imprisonment up to 2 years + Fine of minimum ₹1,000 for each day of default;
(ii) Company- Pay Interest @18% per annum during the period of default.
But, failure to distribute/ pay dividends shall not be an offense in the following cases:
(i) Dividend not paid because of operation of law; or
(ii) Shareholder has given special instructions for the payment of dividend and they cannot be complied with but communicated to shareholder; or
(iii) There’s dispute regarding right to receive dividend; or
(iv) Dividend adjusted against any amount due from the shareholder; or
(v) There’s no default on the part of the company to distribute dividends within time period.
Taxation of dividends distributed amongst shareholders:
In the hands of shareholders
Dividend received by shareholders from domestic companies (Indian companies) is not taxable. But in case of resident shareholders being individual/ HUF/ firm, dividend received by them shall be taxable @10% if the total amount received during the year is more than ₹10 lakhs.
In the hands of
Dividend distributed or paid by domestic companies (Indian companies) is taxable in the name of Dividend Distribution Tax (DDT) @15% (plus applicable surcharge and cess). The rate of DDT is 30% (plus surcharge and cess) in case of deemed dividend under section 2 (22)(e) of the Income Tax Act, 1961.[Deemed dividend- Payment by company by way of loan or advance to a shareholder holding at least 10% voting power or having substantial interest]
The Principal officer of the company and the company shall be held responsible for payment of DDT to the credit of the Central Government within 14 days from the earliest of the following dates:-
a) declaration of dividend; or
b) distribution of dividend; or
c) payment of dividend.
If the Principal officer or the company fails to pay DDT in full or part within 14 days, interest @1% for every month or part of the month shall be charged till the date tax is paid.
Distribution of dividends acts as a booster to the shareholders. It also indicates that the company is doing well and has generated good profits.
CA Saba Naaz
CA in practice, Partner at S. Saraf & Associates, Gurugram, also a blogger at indiantaxhub.blogspot.com. I am passionate about sharing knowledge by writing articles for students and professionals both. I deal in income tax, GST, corporate compliances, audit and accountancy.