Declaring Dividend in Company
Declaring Dividend in Company
A company by declaring dividend can distribute all or a a portion of the net profit to its shareholders. Dividend is a return the shareholders earn on the share capital of the company. In this article, we look at all aspects of declaring dividend in a Company.
A dividend is a distribution of profit of the company amongst its members. Dividend is declared by the Board of Directors of the Company and could vary based on the class of shares held by the shareholder. A dividend is different from interest in that dividend is paid on the share capital of the company whereas interest is paid on loans and debentures. Also, dividends are an appropriation of the profit of the company, whereas interests are a charge on the revenue of the company.
Types of Dividend
There are mainly two types of dividends: interim dividend and final dividend. Interim dividend can be declared by the Board of Directors during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is declared. Final dividend is a dividend that is said to be declared at the annual general meeting of the company. A final dividend is a debt enforceable against the company.
Dividend Distribution Tax – Tax on Dividend
Any amount declared, distributed or paid by the company by way of dividends (both interim dividend and final divided) whether out of current or accumulated profit is charged a dividend distribution tax at the rate of 15% plus surcharge. The company must pay the dividend distribution tax to the credit of the Central Government within 14 days of declaration of dividend or distribution of dividend or payment of dividend, whichever is earlier.
TDS on Dividend
TDS or Tax Deduction at Source is not required for any dividend paid by the Company to resident shareholders who are individuals or Indian companies.
Declaring Dividend in Loss Making Company
A company that is loss making may still declare a dividend provided that there is adequate surplus of reserves and subject to the following conditions:
- The rate of dividend declared shall not exceed the average of the rates at which dividend was declared in the 3 years immediately preceding that year (Provided that this rule shall not apply to a company, which has not declared any dividend in each of the three preceding financial years.)
- The total amount to be drawn from such accumulated profits shall not exceed an amount equal to one-tenth of the sum of its paid-up share capital and free reserves as appearing in the latest audited financial statement;
- The amount so drawn shall first be utilized 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;
- 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 statements.
- 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 of the current year.