Declaration of Dividend Under the Companies Act 2013: The 30-Day Rule That Triggers 18% Interest and Director Jail Time (2026)

Last updated: 18 September 2026 · By CS Sapna Malpani, Practising Company Secretary, Bangalore

A profitable private company in Bengaluru declared a ₹40 lakh dividend at its September AGM, then let the payout sit in the current account while the founders finalised bank mandates. Forty-one days later the money still had not reached three NRI shareholders. Under Section 127 of the Companies Act 2013, that delay stopped being an administrative slip and became an offence: 18% simple interest on the unpaid amount, and every director who was knowingly party to the default exposed to a fine of at least ₹1,000 for each day it continued. The declaration of dividend is the easy part. The clock that starts the moment you declare is where private companies get hurt.

Why the declaration of dividend trips up companies that can well afford to pay

Most defaults here are not about money. The company has the profits, has passed the resolution, and fully intends to pay. What goes wrong is timing and process. Section 123 sets the conditions for a valid declaration, Section 124 governs what happens to money that stays unclaimed, and Section 127 punishes late payment. The three read together, and a company that gets the declaration right can still be caught by Section 127 a month later.

The exposure is widest for private companies in the ₹5 crore to ₹500 crore revenue band. These are the businesses profitable enough to reward shareholders but often without a dedicated secretarial team tracking the day-count. A founder who signs the board minutes rarely realises that the same signature starts a statutory 30-day payment obligation backed by personal criminal liability. According to the Registrar of Companies adjudication trend through 2026, dividend and unpaid-dividend defaults are among the quieter categories that surface during due diligence and secretarial audit, long after the cash question has been settled.

Section 123: the five tests a dividend must pass before you declare it

Before a single rupee is committed, a declaration of dividend under Section 123 has to clear a set of gates. Skip one and the declaration itself is defective, which is a far bigger problem than a late payment.

1. Source of the dividend. A company may declare dividend for a financial year only out of the profits of that year after providing for depreciation, out of accumulated profits of previous years transferred to free reserves, or out of money provided by the Central or State Government under a guarantee. Capital profits and the securities premium account are off limits.

2. Depreciation and past losses. The company must provide for depreciation for the current year, and it must set off carried-forward losses and unabsorbed depreciation of earlier years against the current year's profit before arriving at the distributable figure. A company sitting on a book profit but carrying prior losses may find its distributable amount is far smaller than the balance sheet suggests.

3. Transfer to reserves is now voluntary. The old requirement to move a fixed percentage of profit to reserves before declaring dividend was removed. Since the Companies (Amendment) Act 2015, the Board may transfer any percentage it thinks fit, or none at all. This is a discretion, not an obligation.

4. No dividend if you have defaulted on deposits. A company that has failed to repay deposits accepted under the Act, or to pay interest on them, cannot declare dividend so long as the failure continues. The bar is absolute while the default runs.

5. Cash only, in a separate account. Dividend is payable only in cash, not in kind, though "cash" includes cheque, warrant and electronic transfer. The amount of the dividend, including any interim dividend, must be deposited in a separate account with a scheduled bank within 5 days of the date of declaration. This five-day account is the single most missed step in the entire sequence.

Dividend out of free reserves: the Rule 3 limits in a loss or low-profit year

When the current year's profits are inadequate or absent, a company can still reward shareholders by declaring dividend out of accumulated free reserves. Rule 3 of the Companies (Declaration and Payment of Dividend) Rules 2014 fences this in with four numerical limits that a Company Secretary should compute before the Board meets, not after.

Interim dividend carries its own guardrail. The Board may declare it out of the surplus in the profit and loss account or out of profits of the current financial year. But if the company has incurred a loss during the current year up to the end of the quarter immediately before the declaration, the interim dividend rate cannot exceed the average dividend declared in the three preceding financial years.

The timeline that actually matters: from declaration to IEPF

Here is the sequence that a director should keep in view from the moment a dividend is on the agenda. Every step below is a statutory deadline, not a suggestion.

Two of these deadlines run inside the first six weeks, which is why the declaration of dividend deserves its own checklist rather than a line in the AGM file. For the mechanics of recovering shares once they reach the fund, see our detailed guide on IEPF transfer of unclaimed dividend and shares under Section 124.

Section 127: what the penalty really looks like

Section 127 is short and unforgiving. Where a dividend has been declared but is not paid, or the warrant is not posted, within 30 days from the date of declaration, two consequences follow at once.

The company must pay simple interest at 18% per annum on the unpaid dividend for the whole period the default continues. Separately, every director of the company who is knowingly a party to the default is punishable with imprisonment for a term that may extend to two years and with a fine that shall not be less than one thousand rupees for every day during which the default continues. There is no cap written into the daily fine, so a long delay compounds into a large number.

The statute does carve out narrow relief. Section 127 does not bite where the non-payment is because of operation of law; where a shareholder gave directions that could not be complied with for a reasonable cause; where there is a genuine dispute about the right to receive the dividend; where the company has lawfully adjusted the dividend against a sum due from the shareholder; or where the delay is for any other reason not attributable to the company's own default. These are defences to be documented at the time, not arguments to be invented later.

The full penalty map: not just Section 127

Directors tend to fixate on the 18% figure, but the declaration of dividend has several separate default points, each with its own consequence. This is the map a secretarial auditor works through.

What you must do now: the declaration-of-dividend checklist

If your company declared a final dividend at its 2026 AGM, or the Board is about to approve an interim dividend, work through the following before the money leaves the building.

1. Confirm the source and distributable amount. Compute current-year profit after depreciation, set off carried-forward losses and unabsorbed depreciation, and check whether you are drawing on current profits or free reserves. If it is free reserves, run the four Rule 3 limits and keep the working papers.

2. Check the deposit-repayment bar. Verify the company is not in default on any deposits or interest under Sections 73 to 76. If it is, the dividend cannot be declared until the default is cured.

3. Pass the correct resolution. A final dividend is recommended by the Board and declared by members at the AGM through an ordinary resolution; members may reduce the recommended rate but cannot increase it. An interim dividend is declared by the Board between two AGMs. Record the resolution accurately in the minutes.

4. Open and fund the separate account within 5 days. Deposit the entire declared amount, including interim dividend, into a separate account with a scheduled bank within five days of declaration. Do not let it mingle with the operating account.

5. Deduct TDS and pay within 30 days. Dividend is taxable in the shareholder's hands, so deduct tax at source where applicable before payment, and pay or dispatch to every entitled shareholder within the 30-day window. Pay on a pro rata basis on the amount paid up on each share, in line with Section 51.

6. Sweep the unpaid balance by day 37. Any dividend that remains unpaid or unclaimed after 30 days must move to the Unpaid Dividend Account within the next seven days. Follow it with the website statement within 90 days.

7. Diarise the seven-year IEPF trigger. Track each unpaid amount so that money and shares unclaimed for seven years are transferred to the IEPF on time, not scrambled for later. If you want a single view of every recurring filing and payout deadline, our annual compliance checker maps them against the calendar.

The deeper implication for private companies in 2026

According to CS Sapna Malpani, the risk in dividend compliance has shifted quietly over the last two years. With Registrars of Companies now empowered to adjudicate penalties directly under Section 454, the older assumption that a small payment delay would never reach an authority no longer holds. A dividend default leaves a clean paper trail: a dated resolution, a bank statement, and a shareholder register. That combination is exactly what surfaces in a secretarial audit or an investor's due diligence, and it is difficult to explain away in a funding round or a strike-off review.

The forward-looking point is this. As dividend income became taxable in the shareholder's hands, more private companies started declaring regular dividends to move surplus efficiently, and more of them are declaring for the first time without a settled process. Expect dividend and unpaid-dividend defaults to feature more often in ROC adjudication over the next few filing cycles, precisely because the volume of declarations is rising faster than the compliance discipline behind them.

How dividend rules compare with provisions companies confuse them with

Two mix-ups come up repeatedly. The first is treating the Unpaid Dividend Account and the IEPF as the same thing. They are sequential, not identical: money unpaid after 30 days goes to the Unpaid Dividend Account within 37 days, and only what stays unclaimed there for seven years moves to the IEPF. The second is confusing dividend distribution with buy-back as a route to return cash to shareholders. A dividend is a distribution of profit governed by Sections 123 to 127; a buy-back is a capital transaction under Section 68 with its own limits and tax treatment, covered in our guide on buy-back of shares under Section 68. Choosing the wrong route, or blending the two in the same year, creates problems that are far harder to unwind than a late payment.

Key takeaways

Sources and references

• Section 123, Companies Act 2013 (Declaration of dividend) — ca2013.com
• Section 127, Companies Act 2013 (Punishment for failure to distribute dividends) — ca2013.com
• Companies (Declaration and Payment of Dividend) Rules 2014, Rule 3 — MCA
• Declaration of Dividend: interplay of law and business dynamics — Cyril Amarchand Mangaldas
• From profits or free reserves: payment of final dividend — Corporate Professionals

Frequently asked questions

What is the time limit for payment of dividend after declaration under the Companies Act 2013?

A declared dividend must be paid, or the dividend warrant dispatched, within 30 days from the date of declaration. Separately, the entire dividend amount has to be deposited in a separate account with a scheduled bank within 5 days of declaration. If payment is not made within the 30-day window, Section 127 imposes 18% per annum simple interest on the company and exposes every director knowingly party to the default to imprisonment of up to two years and a daily fine.

Can a private company declare dividend out of free reserves?

Yes. When profits for the year are inadequate or absent, a company may declare dividend out of accumulated free reserves, subject to Rule 3 of the Companies (Declaration and Payment of Dividend) Rules 2014. The rate cannot exceed the average of the three preceding years, the amount drawn cannot exceed one-tenth of paid-up capital plus free reserves, the amount drawn must first set off current-year losses, and the residual reserves must not fall below 15% of paid-up capital. Each figure is taken from the latest audited financial statements.

What is the penalty under Section 127 for not paying dividend on time?

Where a dividend is declared but not paid within 30 days, Section 127 makes the company liable to pay simple interest at 18% per annum on the unpaid amount for the entire period of default. In addition, every director who is knowingly a party to the default is punishable with imprisonment which may extend to two years and with a fine of not less than ₹1,000 for every day during which the default continues. Narrow statutory exceptions apply, such as delays caused by operation of law or a genuine dispute over entitlement.

What is the difference between the Unpaid Dividend Account and the IEPF?

They are two stages of the same process. Any dividend that remains unpaid or unclaimed after the 30-day payment window must be transferred to a special Unpaid Dividend Account within the next seven days under Section 124. Money that then stays unclaimed in that account for seven consecutive years, together with the shares to which it relates, is transferred to the Investor Education and Protection Fund. The Unpaid Dividend Account is the holding stage; the IEPF is the final destination.

Is interim dividend treated differently from final dividend?

The payment discipline is the same: the 5-day deposit rule and the 30-day payment rule apply to interim dividend as well. The difference is in declaration and in one extra limit. An interim dividend is declared by the Board between two annual general meetings, whereas a final dividend is recommended by the Board and declared by members at the AGM. If the company has made a loss in the current year up to the end of the quarter before the interim declaration, the interim rate cannot exceed the average dividend of the three preceding years.

Does a company have to transfer profits to reserves before declaring dividend?

No. The earlier requirement to transfer a fixed percentage of profits to reserves before declaring a dividend was withdrawn by the Companies (Amendment) Act 2015. The Board may now transfer any percentage of profits to reserves that it considers appropriate, or transfer nothing at all. The decision sits with the Board's commercial judgement rather than a statutory formula.