Section 123 Companies Act dividend declaration rules
How a company declares dividend under section 123 of the Companies Act, 2013: the sources it can pay from, the depreciation and reserve conditions, the 30-day deposit and payment window, and where a dividend cannot be paid.
In this guide
Section 123 of the Companies Act, 2013 governs how a company declares and pays dividend. Dividend can be paid only out of current profits after providing for depreciation, out of accumulated past profits, or out of money provided by the government for that purpose. The company must deposit the dividend amount in a separate bank account within five days of declaration and pay it within 30 days. A company that has defaulted on deposits or debt repayment cannot declare dividend while the default continues.
What does section 123 cover?
Section 123 of the Companies Act, 2013 sets the rules for declaring and paying dividend. Section 123 names the sources a dividend can come from, the conditions a company must meet first, and the window for depositing and paying the money once a dividend is declared.
The point of the section is that a dividend is a distribution of real profit, not a return of capital. A company can pay it only from profits it has actually earned and set aside as free reserves, after accounting for depreciation.
Where can a company pay dividend from?
Section 123 allows three sources and rules out the rest. Each source has its own condition attached.
| Source | Condition |
|---|---|
| Current-year profits | After providing for depreciation under Schedule II |
| Undistributed past profits | Held in free reserves, after depreciation |
| Government-provided money | Where paid under a guarantee for dividend |
A company cannot declare dividend from a revaluation reserve or any reserve that is not a free reserve. That keeps the payout tied to earned profit rather than a paper gain on assets.
What conditions apply before declaration?
Depreciation comes first. A company must provide for depreciation for the current year in line with Schedule II before it declares dividend out of that year's profits.
A company may transfer a part of its profits to reserves before declaring dividend, but the transfer is now at the company's discretion rather than a fixed statutory percentage. When a company wants to declare dividend out of accumulated past profits in a year of inadequate current profit, the rules made under section 123 cap the rate and the amount and set a floor for the reserves left behind.
When must the dividend be deposited and paid?
Two clocks start on the declaration date. The company must deposit the dividend amount, including any interim dividend, in a separate bank account within five days of declaration. It must then pay the dividend to the entitled shareholders within 30 days.
- Declare the dividend at the AGM, or by the board for an interim dividend.
- Deposit the total amount in a separate account within five days.
- Pay each entitled shareholder within 30 days of declaration.
- Move any unpaid or unclaimed amount to the Unpaid Dividend Account within seven days after the 30-day window ends.
Failure to pay within 30 days can attract consequences under section 127, which deals with the offence of not paying a declared dividend.
How is interim dividend different?
An interim dividend is declared by the board during the financial year, not by the members at the AGM. The board can declare it out of the surplus in the profit and loss account and out of profits of the current year up to the quarter before the declaration.
If the company has incurred a loss up to the quarter before an interim dividend, the rate of that dividend cannot be higher than the average of the dividends declared in the three preceding financial years. The five-day deposit rule and the 30-day payment rule apply to interim dividend in the same way.
When can a company not declare dividend?
A company that has failed to comply with the deposit provisions in sections 73 and 74 cannot declare dividend while that failure continues. A default in repaying deposits or the interest on them blocks a dividend until the default is made good.
- Depreciation for the year has not been provided.
- The proposed source is a revaluation or other non-free reserve.
- The company is in default on repayment of deposits or their interest.
- The draw from reserves would breach the rate or floor set in the rules.
Where do companies go wrong?
- Declaring dividend before providing for depreciation.
- Paying out of a revaluation reserve rather than free reserves.
- Missing the five-day deposit into a separate account.
- Letting the 30-day payment window lapse.
- Members declaring a higher rate than the board recommended.
Where are the dividend rules published?
The declaration rules sit in section 123 of the Companies Act, the offence of non-payment in section 127, and the transfer of unclaimed amounts in section 125. For the reserve-transfer and rate rules, read the rules made under section 123. Complied AI keeps MCA updates in one feed so you can open a rule amendment and read section 123 next to it.
Practical checks
Common questions
What are the sources a company can declare dividend from?
Section 123 allows three sources. A company can pay dividend out of profits of the current year after providing for depreciation, out of profits of previous years that remain undistributed after depreciation, or out of money the central or a state government provides for paying dividend under a guarantee. It cannot pay dividend out of reserves other than free reserves.
Does depreciation have to be provided before declaring dividend?
Yes. Section 123 requires a company to provide for depreciation in line with Schedule II before it declares dividend out of profits for that year. Dividend paid without providing for depreciation is not a valid declaration under the section.
Within how many days must a declared dividend be paid?
A dividend must be paid within 30 days of declaration. The amount of the dividend, including interim dividend, must also be deposited in a separate bank account within five days of the declaration date. Missing the 30-day window can attract penal consequences under section 127.
Can a company declare dividend if it has a loss in the current year?
Yes, a company can declare dividend out of accumulated profits of earlier years transferred to free reserves, subject to the conditions in the rules made under section 123. The rules cap the rate and the amount that can be drawn from reserves and require the balance of reserves not to fall below a set level after the withdrawal.
What happens to a dividend that stays unpaid?
A dividend that is declared but not paid or claimed within 30 days must be transferred to a special Unpaid Dividend Account within seven days after the 30-day window ends. Amounts that stay unclaimed for seven years move to the Investor Education and Protection Fund under section 125.
Is board approval enough to declare a final dividend?
No. A final dividend is recommended by the board and declared by the members at the annual general meeting, and the members cannot declare a higher rate than the board recommends. An interim dividend is different: the board can declare it during the year without a members' meeting.
Can a company pay dividend out of a revaluation reserve?
No. Section 123 permits dividend only out of free reserves. A reserve created by revaluing assets is not a free reserve, so a company cannot use it to declare dividend.
Publication method
How this guide was prepared
This guide is published by the Complied AI research desk. Its source list and stated position were checked against the official records shown below on 19 September 2026.
Automation, including AI, may assist research, drafting and structure. It does not replace the official record or amount to an independent professional review. Read our editorial standards and corrections policy.
Verification path
Official sources used
Keep reading
Related guides
- Law · SectionsSection 42 Companies Act private placement rulesHow a company raises capital through private placement under section 42 of the Companies Act, 2013: the offer to identified persons, the 200-person cap, the separate bank account, the allotment window, and the return of allotment in Form PAS-3.
- Law · SectionsWhat powers can only the board exercise?What powers the board of directors may exercise under section 179 of the Companies Act, 2013, which powers must be exercised only at a board meeting, the rule 8 list that cannot be delegated, and how these sit with the shareholder controls in section 180.
- Law · SectionsWhich board powers need shareholder approval?Which powers the board can exercise only with a members' special resolution under section 180 of the Companies Act, 2013, the sell-the-undertaking rule, the borrowing limit over paid-up capital and free reserves, and which companies the section applies to.