Dividends are a fundamental aspect of investing, providing shareholders with a steady stream of income. We will explore the definition of dividends, their sources of payment, the types of dividends (interim or final), record dates, and the process of dividend issuance.
What is Dividend:
A dividend is a distribution of earnings made by a company to its shareholders. It represents a share of the enterprise’s income this is allotted to praise shareholders for his or her funding and ownership. Dividends can take the shape of cash payments, extra shares, or other belongings.
From where is Dividend Issued:
Dividends are issued with the aid of the organisation itself the usage of its profits or collected reserves. The choice to distribute dividends is made by the company’s board of directors. They recall various factors, together with the organization’s financial performance, profitability, coins waft, and future increase prospects, Companies purpose to strike stability between profitable shareholders and preserving sufficient budget for reinvestment, growth, and meeting operational requirements.
Sources of Payment of Dividend:
Companies utilize various sources to pay dividends, including:
- Current Profits: Dividends may be paid from the corporation’s current year’s earnings if it has generated sufficient profits. This is regularly the maximum commonplace supply of dividend bills.
- Retained Earnings: Companies may use retained earnings from previous years to distribute dividends. Retained earnings are accumulated profits that have not been distributed as dividends in prior periods. This allows companies to utilize profits from previous years to reward shareholders.
- Free Reserves: Companies may tap into their reserves, which are funds set aside for specific purposes such as dividend payments or future investments. Reserves can act as a buffer to ensure consistent dividend payments, even during periods of lower profitability.
- Borrowings: In certain circumstances, companies may temporarily borrow funds to pay dividends. However, this practice is not sustainable in the long run and is typically used as a last resort when other sources of payment are insufficient.
Dividends can be classified into two main types: interim dividends and final dividends.
- Interim Dividends: Interim dividend is declared and paid during the financial year, before the final financial statements are prepared. These dividends are based on the company’s interim financial results and are distributed periodically to shareholders.
- Final Dividends: Final dividends are declared and paid at the end of the financial year, after the company’s final financial statements are prepared. Final dividends provide a comprehensive reflection of the company’s financial performance and allow shareholders to receive a larger dividend payment based on the full-year results.
Record Date and Recipients of Dividends :
To identify the eligible recipients of dividends, companies establish a record date. The record date is a particular cut-off date declared by the organisation, and then the shareholders listed in the corporation’s register of members on that date are entitled to receive the dividend price. Only shareholders who are recorded as holders of shares on the record date will acquire the dividend. Shareholders who purchase shares after the record date will not be eligible to receive the upcoming dividend payment. The record date ensures fairness and accuracy in distributing dividends to the rightful owners of the company’s shares.
Process of Dividend Issuance :
The process of dividend issuance generally involves the following steps:
- Obtaining Approval of the Board of Directors:
- Passing of Board Resolution for declaration of dividend
- Recommending the rate and quantum of dividend
- Opening special account for depositing the dividend
- Determine the record date.
- Convene General meeting to obtain shareholders’ approval
- Obtaining Approval of the Shareholders.
- Deposit the amount of dividend declared in the separate bank account created in the name of the company within 5 days from the date of declaration of dividend.
- Pay the dividend to the shareholders of the company as on the record date, within 30 days of declaration of dividend.
Tax Treatment of Dividends :
Dividend paid by Indian companies is not taxable in the hands of the shareholder. Dividend paid is subject to TDS at the rate of 10%, for residents and at the rate of 20% for non – residents subject to DTAA, on dividend income paid in excess of Rs. 10,000/- from a company. This tax deducted will be available as a credit from the total tax liability of the tax payer while filing ITR.
A resident individual receiving dividends whose estimated annual income is below the exemption limit can submit form 15G to the company or mutual fund paying the dividend. Similarly, a senior citizen whose estimated annual tax payable is nil can submit Form 15H to the company paying the dividend.
Advance tax provisions apply if the total tax liability of the taxpayer is equal to or more than Rs.10,000 in a particular financial year. Interest and penalty is levied in case of non-payment or short payment of the advance tax liability.
Unclaimed Dividends :
Unclaimed dividends occur when shareholders fail to claim their dividend payments within 30 days period. These unclaimed dividends remain with the company and are sometimes referred to as “undistributed dividends.” There can be various reasons for unclaimed dividends, such as shareholders changing their contact information, oversight in updating records, or shareholders simply not being aware of their entitlement to the dividends. Such unclaimed dividend is to be transferred into a separate bank account known as the unpaid dividend account of the company within 7 days after the expiry 30 days
Claiming Unclaimed Dividends :
Any person claiming to be entitled to any money transferred to the Unpaid Dividend Account of the company may apply to the company for payment of the money claimed. There is no form for such application. However, an application may be prepared mentioning all the relevant details therein and the same may be submitted to the company. The company, after being satisfied, with the particulars of the application may pay the amount of dividend to such person out of the unpaid dividend account.
Conclusion :
Interim dividends provide shareholders with regular income and play a crucial role in investment returns. Understanding the types of dividends, their sources of payment, the process of dividend issuance, and the tax implications is essential for investors. Additionally, shareholders should be aware of unclaimed dividends and the procedure for claiming them to ensure they receive their rightful payments.