Section 123 of the Companies Act, 2013 lays down the legal provisions for the declaration of dividend by companies in India. It ensures that dividends are declared only out of legitimate profits, safeguarding the interests of creditors and stakeholders.

Sources from Which Dividend Can Be Declared
A company may declare dividend only out of the following sources:
✅ a) Current Year’s Profit
After providing for depreciation as per Schedule II of the Companies Act, 2013.
✅ b) Surplus Profits of Previous Years
The company may use the undistributed profits of previous years, after providing for depreciation.
✅ c) Both (a) and (b) Combined
✅ d) Out of Reserves (In Case of Inadequate Profits)
In case of inadequacy or absence of profits, a company can declare dividend out of free reserves, but only in accordance with Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014.

Restrictions on Declaration of Dividend
🔹 No dividend shall be declared if the company has not set off carried forward losses or unprovided depreciation from previous years against current profits.
🔹Dividend can only be paid in cash, through cheque or electronic transfer. However, issue of fully paid-up bonus shares is permitted as an alternative.

Rules for Declaration from Reserves
As per Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014, the following conditions must be fulfilled to declare dividend out of reserves:

🔹 a) Rate of Dividend Limit
The rate of dividend shall not exceed the average of the last three years’ dividend declared (if any).
🔹 b) Withdrawal Limit
The total amount withdrawn from reserves shall not exceed 1/10th of the paid-up share capital + free reserves.
🔹 c) Loss Adjustment
The withdrawn amount shall first be used to offset the current year’s loss (if any).
🔹 d) Reserve Balance Post Withdrawal
The balance of reserves post-withdrawal must not fall below 15% of paid-up share capital as per the latest audited financial statement.

Timeline for Dividend Payment
Once a dividend is declared at the AGM:
🔹 It must be paid within 30 days of declaration.

Disclosure Requirements
🔹Companies must disclose the following in the Board Report:
🔹Amount of dividend declared
🔹Rate of dividend
🔹Amount proposed to be transferred to reserves (if any)
🔹Past three years’ dividend data (if declaring from reserves)

Applicability
Section 123 applies to all companies except:
🔹Section 8 companies
🔹Companies not having profit or surplus
🔹Private companies are also subject to these rules unless exempted under special provisions or notifications.