# Sources from which Dividend may be Declared — Sec 123(1)
Dividend may only be declared or paid for any financial year out of the following sources:
## 1. Permitted Sources
| # | Source | Condition |
|---|---|---|
| (a) | Profits of the current financial year | After providing for depreciation as per Schedule II |
| (b) | Undistributed profits of any previous financial year(s) — i.e., credit balance in P&L A/c and free reserves | After providing for depreciation |
| (c) | Both (a) and (b) combined | After providing for depreciation |
| (d) | Money provided by the Central Government or State Government | Only in pursuance of a guarantee given by such government |
## 2. Mandatory Conditions Before Declaration
### (a) Set-off of Past Losses and Depreciation
Before declaring any dividend, the company must set off any past losses and unprovided depreciation of any previous financial year(s) against the current year's profits.
### (b) Capital Profits — NOT Available
Capital profits cannot be used for declaring dividend, as they are not considered 'distributable profits'.
## 3. Transfer to Reserves — Now Discretionary
Under the 2013 Act:
- Transfer of any portion of profits to reserves is at the company's discretion.
- The company may transfer any amount or no amount at all before declaring dividend.
- (The earlier compulsory transfer prescribed under the 1956 Act has been done away with.)
## 4. Free Reserves — Sec 2(43)
'Free reserves' = such reserves which, as per the latest audited balance sheet, are available for distribution as dividend.
### Exclusions from Free Reserves
| Item | Reason |
|---|---|
| Revaluation Reserve | Represents unrealised/notional gains from asset revaluation |
| Fair Value Adjustments (Ind AS) | Changes in carrying amounts of assets/liabilities recognised in equity, including surplus from fair value measurement |
## Logic
Dividend is a payment out of real, earned and realised profits. Notional, unrealised, or capital gains cannot be treated as profits available for distribution — otherwise the company would distribute capital, weakening creditor protection.
## Key Takeaway
The four permitted sources can be remembered as: CY profits + Past profits/Free reserves + Both + Govt guarantee money. And the two big NOs: No capital profits, No revaluation/Ind AS fair value reserves.