Dividends are one of the main attractions of investing in stocks and creating a source of passive income. Did you know that companies are not bound or mandated to declare dividends every year? However, there are also companies that declare dividends more than once a year. This kind of dividend declared in the middle of the financial year is known as an interim dividend. So can all companies declare interim dividends? And how and why are they declared? Read on to get all your answers and learn more about interim dividends.
What is the meaning of an interim dividend?
Let us first understand the meaning of dividends. Dividends are the portion of the net profits of the company that is shared with the shareholders of the company. It is one of the ways in which a company shares its financial success with its shareholders. A company can share its profits in the form of cash dividends, stock dividends, property dividends, scrip dividends, and liquidating dividends.
An interim dividend, on the other hand, is a dividend paid by a company to its shareholders before the company’s financial year-end or annual financial statements are finalized. Therefore, it is an intermediate dividend payment made during the financial year, usually in between regular dividend distributions.
Why is interim dividend declared?
The purpose of an interim dividend is to provide shareholders with a portion of the company’s profits or reserves before the completion of the financial year. This allows shareholders to benefit from the company’s financial success sooner rather than having to wait until the end of the financial year for the final dividend.
Interim dividends are typically declared and paid when a company has surplus profits or excess cash reserves that it wishes to distribute. The decision to declare an interim dividend lies with the company’s board of directors, who assess the financial position and profitability of the company to determine if it is feasible to distribute an interim dividend. However, shareholders have the power to ratify this decision or reject the same.
How is interim dividend taxed?
Interim dividend is a taxable income as per the provisions of the Income Tax Act, 1961. Prior to abolishing the DDT, the interim dividend was taxable in the hands of the corporates declaring the same. However, post Budget 2020, similar to the final dividend paid by the company, interim dividend is taxed in the hands of the receiver.
This income is classified under the head “Income From Other Sources’ and added to the taxable income to be taxed at the applicable slab rates.
In the case of resident corporate shareholders, the interim dividend income will be added to the income of the financial year in which it is received and taxed at the corporate tax rate of 25% excluding cess and surcharge. Furthermore, in the case of non-resident shareholders eligible for interim dividends, the applicable tax rate will depend on the provisions of section 90 and section 91 of the Income Tax Act.
The tax treatment of interim dividends for different categories of shareholders is summarised in the table below.
|Category of taxpayer
|Tax Treatment of interim dividend
|Resident individual taxpayer
|Added to the taxable income under the head Income From Other Sources and taxed at applicable slab rates.
|Added to the income of the financial year and are taxed at the applicable corporate tax rate (25% excluding cess and surcharge)
|Taxable as per the provisions of section 90 and section 91 of the Income Tax Act, 1961
Any payment of interim dividends to eligible shareholders in excess of Rs. 5,000 is subject to TDS provisions. In such cases, TDS at the rate of 10% will have to be deducted and deposited by the company and the balance will be disbursed to the shareholder. In the case of non-resident taxpayers (individuals or corporate) the rate of deducting TDS is 20% as per the provisions of the Act. The company is required to issue Form 16A doe the TDS deducted by the company which will also be reflected in Form 26AS.
How is the interim dividend different from the final dividend?
The key differences between the interim dividend and the final dividend are
|Interim Dividend is declared and paid during the financial year before the year-end and before the finalization of the annual financial statements.
|Final dividends are declared and paid at the end of the financial year after the finalization of the annual financial statements.
|Authority to declare a dividend
|The decision to declare interim dividends lies with the company’s board through a Board Resolution
|The final dividend is declared by the Board of Directors after approval from the shareholders in the AGM through an Ordinary Resolution
|Rate of dividend
|The rate at which the interim dividend is declared is always lower than that of the final dividend
|The rate of the final dividend is higher than that of the interim dividend.
|Revocation of Interim dividend
|Shareholders can revoke the decision to declare an interim dividend with the consent of all shareholders.
|Final dividend once duly declared cannot be revoked even by shareholders.
Interim dividend is part of the normal course of business and is declared by companies to instill further confidence in the shareholders of the company. This dividend though declared within the financial year has to be passed through a Board Resolution and is permissible only if it is allowed in the Articles of Association.
The declaration of interim dividends by a company is seen as an indication of the company’s financial health, surplus cash position, and willingness to share immediate returns with shareholders. Further, it demonstrates management’s confidence in the company’s financial performance and achieving its target growth path.
Interim dividends can be declared and paid from surplus in the Profit & Loss account, profits of the financial year, or profits generated until the quarter preceding the declaration. The Board considers the financial results for the period of the interim dividend and ensures the company’s financial position justifies and supports the dividend declaration, taking into account factors such as depreciation, tax obligations, anticipated losses, and dividend requirements for preference shares.
Yes, interim dividends can be declared by a loss-making company if it has accumulated profits or reserves from previous years that can be utilized for dividend distribution. Furthermore, as per Section 123(3) of the Companies Act, if a company has incurred a loss during the current financial year until the preceding quarter, any interim dividend declared cannot exceed the average dividends paid by the company in the preceding three financial years.
No, the approval of shareholders is not mandatory for declaring interim dividends as per the Companies Act, 2013. The decision to declare interim dividends is typically made by the company’s board of directors, exercising their discretionary power.