Dividend is a distribution of a company's profits to its shareholders in proportion to their shareholding, declared by the company either annually or at interim intervals. Under Indian law, dividend is defined in Section 2(35) of the Companies Act, 2013, and the procedure for its declaration and payment is governed by Sections 123 to 127.
Legal definition
Section 2(35) of the Companies Act, 2013 defines:
"Dividend" includes any interim dividend.
Section 123(1) provides the framework for declaration:
No dividend shall be declared or paid by a company for any financial year except —
(a) out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of this Act, or out of the profits of the company for any previous financial year or years arrived at after providing for depreciation and remaining undistributed, or out of both; or
(b) out of money provided by the Central Government or a State Government for the payment of dividend by the company in pursuance of a guarantee given by that Government.
Section 123(3) provides that the board of directors may declare an interim dividend during any financial year or at any time during the period from the closure of the financial year until the holding of the annual general meeting, out of the surplus in the profit and loss account or out of profits of the financial year for which the interim dividend is sought to be declared.
How courts have interpreted this term
Dhakeswari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC)
The Supreme Court held that dividend is a share of the profits distributed among shareholders and that the declaration of dividend is a matter within the discretion of the company's management, subject to the provisions of the Companies Act. The Court established that no shareholder has an inherent right to demand dividend — it must be declared by the company through the proper procedure.
In Re: Yenidje Tobacco Co. Ltd. [1916] 2 Ch 426 (applied in India)
The Court held that persistent refusal to declare dividends despite the availability of profits can, in certain circumstances, constitute grounds for oppression under company law, establishing the principle that while dividend declaration is discretionary, the discretion must be exercised bona fide and not to the prejudice of a class of shareholders.
Types of dividend
- Final dividend: Recommended by the board and declared by the shareholders at the annual general meeting. Once declared, it becomes a debt payable by the company and cannot be revoked.
- Interim dividend: Declared by the board of directors between two AGMs, out of the surplus in the profit and loss account or profits of the current financial year. An interim dividend can be revoked before actual payment.
- Dividend in kind (property dividend): Although rare, a company may distribute dividend in the form of assets other than cash, subject to the terms of its articles.
Why this matters
Dividend is the primary mechanism through which shareholders receive a return on their investment in a company. For equity shareholders, the dividend is variable and depends on the company's profitability and the board's recommendation. For preference shareholders, the dividend is fixed at the rate specified in the terms of issue and carries priority over equity dividends.
Practitioners should note several critical compliance points under Section 123. Dividend must be paid only out of profits after providing for depreciation — the Act does not permit dividend payments from capital. Where a company has inadequate profits in a given year, it may declare dividends from accumulated profits of previous years, but only in accordance with the Companies (Declaration and Payment of Dividend) Rules, 2014. Dividend must be paid within 30 days of its declaration, and failure to pay within this period attracts penalties and interest under Section 127.
A common misconception is that shareholders can compel a company to declare dividends. In Indian law, the declaration of dividend remains at the discretion of the board and the shareholders in general meeting. However, the Tribunal under Sections 241-242 may intervene if persistent non-declaration of dividends, despite adequate profits, constitutes oppression of minority shareholders.
Related terms
Broader concepts:
Related concepts:
Related procedures:
Frequently asked questions
Can a company declare dividend from its reserves?
Yes. Under Section 123(1), a company may declare dividend out of profits of the current year, profits of previous years remaining undistributed, or both. If profits are inadequate, the company may declare dividend from accumulated reserves subject to the Companies (Declaration and Payment of Dividend) Rules, 2014.
What happens if a company fails to pay declared dividend within 30 days?
Under Section 127, if a dividend is not paid within 30 days of declaration, every director who is knowingly a party to the default shall be punishable with imprisonment of up to two years and a fine of Rs. 1,000 per day of default. The company must also pay simple interest at 18% per annum on the unpaid dividend amount.
Is dividend income taxable in India?
Yes. Dividend income is taxable in the hands of the shareholder. Following the Finance Act, 2020, the Dividend Distribution Tax (DDT) regime was abolished, and dividend income is now taxed at the applicable slab rate of the individual shareholder. Companies are required to deduct TDS on dividend payments exceeding Rs. 5,000 in a financial year under Section 194 of the Income Tax Act, 1961.
Can the board declare final dividend without shareholder approval?
No. A final dividend must be recommended by the board of directors and declared by the shareholders at the annual general meeting by ordinary resolution under Section 123(1). The shareholders cannot declare a dividend higher than the amount recommended by the board.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.