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
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
(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
(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(ii) The total amount withdrawn from profits should not be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(iii) At first, utilizes the amount withdrawn to set off any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 record of names, last known addresses, amount, certificate number, beneficiary details, etc. of the persons whose unclaimed or unpaid dividend is transferred to IEPF.
(ii) Company shall intimate the shareholders whose unclaimed
dividend is being transferred to IEPF, at least 3 months before the date of
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
(iii) There’s dispute regarding right to receive dividend;
(iv) Dividend adjusted against any amount due from the
(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 company
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
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.