Provisions and Law Application:- ( Source: Section 123 read with Chapter VIII of Companies Act, 2013)
A. Dividend shall be declared or paid by a company for any financial year: -
1) Out of the profits of the company for that year arrived at after providing for depreciation in accordance with the Schedule II,
OR/AND
2) Out of the profits of the company for any previous financial year or years arrived at after providing for depreciation in accordance with the provisions of Schedule II and remaining undistributed.
3) Where owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the free reserves then such declaration of dividend shall be made after complying with all the following conditions: – (Source: Rule to Section 123 of Companies Act, 2013)
a) The rate of dividend declared shall not exceed the average of the rates at which dividend was declared by it in the three years immediately preceding that year but this condition shall not apply to a company, which has not declared any dividend in each of the three preceding financial year.
b) The total amount to be drawn from such accumulated profits shall not exceed 10% of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement.
c) The amount so drawn shall first be utilised to set off the losses incurred in the financial year in which dividend is declared before any dividend in respect of equity shares is declared. d) The balance of reserves after such withdrawal shall not fall below 15% of its paid-up share capital as appearing in the latest audited financial statement.
B. Other Points to be considered: -
1. In computing profits any amount representing unrealised gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded.
2. No dividend shall be declared or paid by a company from its reserves other than free reserves.
3. No company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.
4. In case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding three financial years.
5. The Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till 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 such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend.
C. Points to be considered after Finalising Amount of Dividend by the Company: - (Source:- Section 173 read with Chapter VIII)
1. Issue Notice of Board Meeting to all the Directors of Company at their addresses registered with the Company, at least 7 days before the date of Board Meeting. A shorter notice can also be issued and Attach Agenda, Notes to Agenda and Draft Resolution with the Notice.
2. Hold a meeting of Board of Directors of the Company and pass the necessary Board Resolution for considering declaration of interim dividend to Shareholders along with the source of payment and to open a separate Bank Account in a Scheduled Bank for making payment of Interim Dividend to the Shareholders and for keeping unpaid Dividend and Deciding about the Record Date.
3. The amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.
4. Where a dividend has been declared by a company it shall been paid within thirty days from the date of the declaration to any shareholder entitled to the payment of the dividend otherwise company shall be liable to pay simple interest at the rate of 18% per annum during the period for which such default continues.
5. If dividend is not paid within 30 days of declaration then the company shall, within seven days from the date of expiry of the said period of thirty days, transfer the total amount of dividend which remains unpaid or unclaimed to a special account to be opened by the company in that behalf in any scheduled bank to be called the Unpaid Dividend Account.
D. Taxation of Dividend Paid by Company on or after 01-04-2020:-
With effect from April 01,2020, As per Income Tax Act, 1961, the dividend income is taxable in the hands of shareholders. The domestic companies shall not be liable to pay DDT on dividend distributed to shareholders on or after 01-04-2020.But domestic companies shall be liable to deduct tax under Section 194.
A. Points to be considered by domestic company paying Dividend:-
1. As per the Section 194, dividend distributed, declared or paid on or after 01-04-2020, an Indian company shall deduct tax at the rate of 10% (Rate reduced to 7.5% due to Covid-19 for dividends paid till 31 March 2021) from dividend distributed to the resident shareholders.
2. If the dividend paid to a resident individual shareholder does not exceed Rs 5,000 in a financial year, no TDS is applicable. If the resident individual shareholder provides declaration in Form 15G/ Form 15H, no TDS is applicable.
3. The entire dividend amount will be subject to TDS for non-individual resident shareholders (HUF, Firm, AOP, BOI, Company etc) without any threshold limit. The tax deduction rate will be 10% (Rate reduced to 7.5% due to Covid-19 for dividends paid till 31 March 2021).
4. If the dividend paid to non-resident shareholder then entire dividend amount will be subject to TDS without any threshold limit. Tax shall be deducted at source @ 20% (plus applicable surcharge and cess) on dividend.
However, where a non-resident shareholder is eligible to claim the tax treaty benefit, and the tax rate provided in the respective tax treaty is beneficial to the shareholder, then the rate as per the tax treaty would be applied.
5. If PAN details are not updated with the company for shareholder then TDS rate will be 20% at time of payment of dividend.