Chapter VIII - Declaration and Payment of Dividend
Section 123
Section 123: declaration of dividend
A company may declare or pay dividend only out of the profits or government money the section permits, after depreciation and set-off of carried-over losses, and must deposit the amount in a separate scheduled-bank account within five days.
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This article is for general information. Refer to the Companies Act, 2013 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) 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 sub-section (2), or 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 that sub-section and remaining undistributed, or out of both: Provided that 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; 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: Provided that a company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves of the company: Provided further that 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, such declaration of dividend shall not be made except in accordance with such rules as may be prescribed in this behalf: Provided also that no dividend shall be declared or paid by a company from its reserves other than free reserves: Provided also that 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.
(2) For the purposes of clause (a) of sub-section (1), depreciation shall be provided in accordance with the provisions of Schedule II.
(3) 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: Provided that 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 immediately preceding three financial years.
(4) 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.
(5) No dividend shall be paid by a company in respect of any share therein except to the registered shareholder of such share or to his order or to his banker and shall not be payable except in cash: Provided that nothing in this sub-section shall be deemed to prohibit the capitalisation of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any amount for the time being unpaid on any shares held by the members of the company: Provided further that any dividend payable in cash may be paid by cheque or warrant or in any electronic mode to the shareholder entitled to the payment of the dividend.
(6) A company which fails to comply with the provisions of sections 73 and 74 shall not, so long as such failure continues, declare any dividend on its equity shares.
Introduction
Section 123 controls where dividend can come from and how it is paid. It applies to final and interim dividend and works with Schedule II (depreciation) and sections 73 and 74 (deposits).
The Companies (Amendment) Act, 2015 added the requirement to set off carried-over losses and unprovided depreciation (from 29 May 2015). The Companies (Amendment) Act, 2017 excluded unrealised and fair-value gains from distributable profits, limited the accumulated-profits route to free reserves, and widened the interim-dividend window (from 9 February 2018).
Key takeaways
Permitted sources only
Profits of the year or undistributed profits of earlier years, each after depreciation under Schedule II, or money provided by the Central or a State Government under a guarantee.
Exclude paper gains
Unrealised gains, notional gains, revaluation of assets and fair-value changes in the carrying amount of assets or liabilities are excluded when computing profits.
Deposit and pay correctly
Deposit the dividend in a separate scheduled-bank account within five days of declaration and pay it in cash (cheque, warrant or electronic mode) to the registered shareholder or to his order or banker.
Identify a permitted source
Under section 123(1), dividend for a financial year may be declared or paid only out of (a) the profits of that year, or undistributed profits of earlier years, in each case arrived at after providing for depreciation under Schedule II, or both; or (b) money provided by the Central Government or a State Government for paying dividend under a guarantee given by that Government.
When computing profits, exclude any amount representing unrealised gains, notional gains, revaluation of assets, and any change in the carrying amount of an asset or liability on fair-value measurement.
- India Code — consolidated Companies Act, 2013, section 123
- Gazette of India — Companies Act, 2013 as enacted (No. 18 of 2013), section 123
- eGazette — MCA notification S.O. 902(E), 26 March 2014 - listed provisions in force from 1 April 2014
- eGazette — Companies (Amendment) Act, 2015 (No. 21 of 2015)
- eGazette — MCA notification S.O. 1440(E), 29 May 2015 - sections 1 to 12 and 15 to 23 of Act 21 of 2015 in force
- eGazette — Companies (Amendment) Act, 2017 (No. 1 of 2018)
- eGazette — MCA notification S.O. 630(E), 9 February 2018 - listed sections of Act 1 of 2018 in force
Apply the provisos before declaring
Before declaring dividend, the company may transfer any percentage of the year’s profits it considers appropriate to its reserves. No dividend may be declared or paid from reserves other than free reserves.
Where profits are inadequate or absent and the company proposes to declare dividend out of accumulated profits of earlier years transferred to free reserves, the declaration must follow the rules prescribed for that purpose.
No dividend may be declared unless carried-over previous losses and depreciation not provided in earlier years are set off against the current year’s profit.
Interim dividend
The Board may declare interim dividend during the financial year or between the close of the financial year and the annual general meeting. The source must be the surplus in the profit and loss account, profits of the financial year for which it is declared, or profits generated in that year up to the quarter before the declaration.
If the company has incurred a loss in the current financial year up to the end of the quarter immediately preceding the declaration, the interim rate cannot exceed the average dividend rate declared during the immediately preceding three financial years.
Deposit, payment and the deposit-default bar
Deposit the dividend amount, including interim dividend, in a separate account with a scheduled bank within five days of declaration. Pay it only to the registered shareholder, to his order or to his banker, and only in cash; cheque, warrant or electronic payment is expressly permitted.
Capitalising profits or reserves to issue fully paid-up bonus shares, or to pay up unpaid amounts on members’ shares, is not prohibited by the cash-only rule. A company that fails to comply with sections 73 and 74 cannot declare any dividend on its equity shares while that failure continues.
Practical preparation
Confirm the profit figure after Schedule II depreciation; strip unrealised, notional, revaluation and fair-value gains; set off carried-over losses and unprovided depreciation; confirm free reserves for any reserve-funded dividend and check the prescribed rules; for interim dividend, test the loss-quarter cap; check that no section 73 or 74 failure is continuing; deposit within five days; pay only to registered holders.
Practical checklist
Do
- Document the distributable-profit computation, including excluded fair-value and revaluation gains.
- Open the separate scheduled-bank dividend account before or immediately after declaration so the five-day deposit is met.
- Check the register of members as on the relevant date before payment.
Avoid
- Do not fund dividend from any reserve other than free reserves.
- Do not declare dividend while a section 73 or 74 deposit default continues.
- Do not pay dividend in kind; the capitalisation of profits or reserves described in the first proviso to section 123(5) is a separate, permitted route.
Illustrative example
Hypothetical: interim dividend in a loss quarter
A company has a loss for the current year up to the end of the quarter before a proposed interim dividend, but holds a surplus in its profit and loss account.
Source
Confirm the surplus in the profit and loss account is a permitted source under section 123(3).
Rate cap
Calculate the average dividend rate declared in the immediately preceding three financial years and keep the interim rate at or below it.
Deposit
Deposit the interim dividend in a separate scheduled-bank account within five days of the Board’s declaration.
Outcome
- The interim dividend can be declared from the surplus, but its rate is capped because of the loss in the current year up to the preceding quarter.
Glossary
- Free reserves
- Reserves available for distribution as dividend; section 123 bars dividend from any other reserves.
- Interim dividend
- Dividend declared by the Board during a financial year or before the annual general meeting, within section 123(3).
- Scheduled bank
- The class of bank in which the separate dividend account must be opened under section 123(4).
Frequently asked questions
Can revaluation gains be used to pay dividend?
No. Since 9 February 2018 the proviso to section 123(1)(a) excludes revaluation of assets and other unrealised, notional and fair-value gains from profits computed for dividend.
Must previous losses be set off first?
Yes. Under the proviso inserted in 2015, carried-over previous losses and depreciation not provided in earlier years must be set off against current-year profit before dividend is declared.
How quickly must dividend money be deposited?
Within five days from the date of declaration, in a separate account with a scheduled bank. This applies to interim dividend too.
Can the Board declare an interim dividend after the year ends?
Yes. Section 123(3) allows declaration at any time between the close of the financial year and the holding of the annual general meeting, out of the permitted sources.
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Contact BizeneedLast updated 11 October 2026